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Country Reviews
OECD
Economic Surveys
France
ECONOMICS
July 2003
1
2
TABLE OF CONTENTS
ASSESSMENT AND RECOMMENDATIONS............................................................................................ 6
I. OVERVIEW OF ECONOMIC DEVELOPMENTS AND CHALLENGES ............................................ 19
Recent developments................................................................................................................................. 19
The short-term outlook.............................................................................................................................. 32
Fiscal policy in 2003 and 2004 ................................................................................................................. 32
The challenge of ageing to long-term fiscal sustainability........................................................................ 33
Improving potential output could improve prospects................................................................................ 35
Action is required soon ............................................................................................................................. 38
II. POLICIES TO RAISE POTENTIAL OUTPUT...................................................................................... 41
Growth through resource deepening ......................................................................................................... 41
Reforms to improve firm-level performance............................................................................................. 58
Some aspects of sustainable development................................................................................................. 70
Summary ................................................................................................................................................... 79
III. PUBLIC EXPENDITURE MANAGEMENT........................................................................................ 87
Spending in international comparison....................................................................................................... 87
The challenges ahead ................................................................................................................................ 90
Budgetary process and arrangements across levels of government .......................................................... 91
Policies to strengthen public expenditure management .......................................................................... 100
Summing up ............................................................................................................................................ 118
Notes
Annex
I. Long-term fiscal simulations
Glossary of acronyms
Bibliography
Boxes
1.
2.
3.
4.
5.
6.
7.
8.
Recent measures affecting taxes
The government's proposed pension reform
Evaluating the employment impact of the 35 hours legislation
Proposed measures to support the creation, financing and efficiency of small and medium
enterprises
The State as entrepreneur
Policy integration across sustainable development areas
Fiscal relations between levels of government
The social security system
3
9.
10.
11.
12.
13.
Special social security financing funds
Incomes of the elderly
Main difference between public- and private-sector pension schemes
Decentralisation
Summary of recommendations
Tables
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Quarterly gross domestic product
General government accounts
Fiscal sustainability and structural reform
Impact of spending reform on fiscal sustainability
Employment programmes for youth under 26 years of age
Expected change in labour costs for minimum-wage workers
Early-retirement schemes and older-worker employment
Legal corporate income tax rates
Inflation of name brand versus in-house products
Main indicators: climate change
Greenhouse gas emissions and sectoral indicators
Long run marginal costs of power generation
Overview of progress in structural reform
Major current government outlays
Organisation of the public sector in France
Preparation of the State budget
Fiscal consolidation in the OECD
Performance indicators: sustainable retirement income
Official estimates of pension fund balances
Figures
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
Recent economic trends
Reduced supply-side tensions
Business sector indicators
Price developments
Wages, labour costs and competitiveness
Employment and unemployment
Current account balance
Monetary conditions
Long-term debt dynamics
Employment rates
Trends in youth employment
Minimum wages
SMIC, take-home pay, labour and employment
Harmonising minimum wages and low-wage worker social security reductions
Older worker employment rates
Financial incentives of retirement schemes
Water quality of rivers and streams
Nitrates in underground aquifers
Financial costs of water pollution
4
20.
21.
22.
23.
24.
25.
Public expenditure
General government primary expenditure by economic category
Expenditure shares by level of government
Slippage in multiyear targets
Asymmetric response of expenditures to the economic cycle
Range of activity of social security schemes
5
BASIC STATISTICS OF FRANCE
THE LAND
2
Area (1 000 km ), 1998
Agricultural area, excl. overseas
departments (1 000 km2), 1998
632.8
Major cities (thousand inhabitants), 1999:
Paris
Marseille
Lyon
300.0
2 125
798
445
THE PEOPLE (2002)
Population (thousands)
61 075
Number of inhabitants per km2
Average annual increase
(thousands), 1990-2002
Total labour force excl. overseas
departments (thousands)
Percentage of employment in:
Agriculture
Industry and construction
Services
96
254
27 048
3.7
23.7
72.7
PRODUCTION (2002)
Gross domestic product at market prices
(FF billion)
Gross domestic product per capita (euros)
Gross fixed investment as a per cent of
GDP (current prices)
Gross value-added by activitym at basic
prices (per cent):
Agriculture
Industry
Construction
Services (excl. FISIM)
1 523
24 930
19.5
3.1
22.2
4.3
70.4
GENERAL GOVERNMENT (2002)
ESA95 concept, as per cent of GDP:
Current expenditure
Current revenue
Gross fixed investment
54.0
50.5
3.3
FOREIGN TRADE (2002)
Exports of goods and services (% of GDP)
Main exports as a percentage of total
exports (SITC):
Food, beverages and tobacco (0+1)
Chemical products (5)
Manufactured products (6+8+9)
Machinery and transport equipment (7)
27.0
Imports of goods and services (% of GDP)
Main imports as a percentage of total
imports (SITC):
Food, beverages and tobacco (0+1)
Chemical products (5)
Manufactured products (6+8+9)
Machinery and transport equipment (7)
12.8
15.2
23.9
43.8
24.9
8.3
13.3
28.8
37.6
THE CURRENCY
Monetary unit: euro
Currency unit per $, average of daily
figures:
Year 2002
April 2003
6
1.061
0.9199
This Survey is published on the responsibility of
the Economic and Development Review Committee of the
OECD, which is charged with the examination of the
economic situation of Member countries.
The economic situation and policies of France
were reviewed by the Committee on 20 May 2003. The
draft report was then revised in the light of the
discussions and given final approval as the agreed report
of the whole Committee on 26 June 2003.
The Secretariat’s draft report was prepared for
the Committee by Andrew Burns, Alessandro Goglio and
Boris Cournède under the supervision of Yutaka Imai.
The previous Survey of France was issued in
November 2001.
7
8
ASSESSMENT AND RECOMMENDATIONS
French economic growth
has slowed
1.
Activity has slowed in the past 18 months, following several years
of strong employment and output growth. Although GDP increased by only
1.2 per cent in 2002, the labour market has resisted remarkably well.
Employment has continued to rise and unemployment has edged up only
marginally. Accommodative monetary conditions and a sharp and largely
structural relaxation of fiscal policy likely reduced the extent of the
slowdown. However, the budgetary easing caused the general government
deficit to reach 3.1 per cent of GDP, prompting the European Commission to
initiate its excessive deficit procedure. The slowdown reflected a significant
cutback in investment activity. While the average growth rate for 2003
should be less than 1 per cent, corporate and household balance sheets
remain in good shape, suggesting that, as international uncertainty dissipates,
growth could accelerate, reaching a rhythm of about 2 per cent during the
course of 2004. Moreover, the slowdown has turned the output gap negative,
greatly reducing supply side pressures. As a result, a return to higher growth
rates is not expected to generate increasing inflation in the near term.
Rising pension and health
costs pose a medium-term
challenge,…
2.
France faces a daunting task in meeting the fiscal challenge posed
by the ageing of its population, which is expected to result in the ratio of
people retired to those employed doubling by 2030. As a result, there will be
only one worker to support every retiree. This has obvious implications for
the sustainability of the country’s pay-as-you-go pension scheme, but will
also add further impetus to healthcare costs that are already rising strongly as
a share of GDP. The challenge posed is all the greater because, at the same
time as ageing raises spending pressures, the exit from the work force of the
large baby-boom cohorts will reduce the rate at which employment and
therefore potential output grow -- thereby slowing the increase in the tax
base needed to pay for these services. Notwithstanding continued
improvements in productivity and income levels, the operational deficit of
the health and pension systems would increase by some 5 per cent of GDP
by 2030 in the absence of far-reaching policy changes. Allowing such
deficits to accumulate over time is not a realistic option because the resulting
build-up of debt would be unsustainable. OECD estimates suggest that the
debt to GDP ratio could more than double by 2030. While the ageing
challenge is a long-run one, actions to deal with it are nonetheless urgent,
both because deep reforms can only yield results over time and because
reform options become fewer and more costly the longer they are deferred.
… requiring fundamental
reform to avoid an
unsustainable build up of
debt
3.
Addressing the ageing challenge will require substantial efforts on
a number of fronts. Raising taxes or social security contributions to close the
emerging fiscal imbalance, might quickly become self-defeating in an
increasingly integrated world economy. The tax burden in France is already
very high in international comparison. Raising it further could induce both
capital and skilled labour to go elsewhere, and, in so doing, threaten both the
9
tax base and longer-term growth prospects. On the other hand, there would
seem to be considerable scope for structural reforms that could generate
savings while nevertheless respecting societal priorities. Proposals to reform
the healthcare system by making both its administrators and its users more
responsible for overall costs is an important initiative that could have
significant medium-term impacts on the growth of expenditure. As concerns
pensions, plans to align the mandatory contribution period of public servants
to those of the private sector, currently 40 years, and extend both in line with
improvement in life expectancy are sensible. Such steps should help reduce
the substantial inequalities between the private and public systems, although
many will remain. Proposals to abolish financial disincentives to continue
working after reaching retirement age will serve to raise potential output and
reduce imbalances. All of these are steps in the right direction. However,
notwithstanding the real difficulties that such measures may imply, more
changes along similar lines will be required. Moreover, the authorities will
need to take steps to improve the way public expenditure is managed and
programmes evaluated -- issues addressed below.
As a result, fiscal policy
needs to be tightened
4.
The long-run fiscal challenge amplifies the need to strengthen the
budget in the shorter term. The authorities will need to quickly redress the
recent fiscal slippage and make concrete progress towards re-establishing
medium-term budgetary equilibrium in line with official objectives.
Unfortunately, even taking into account decisions to cancel some State
Budget credits and to create an additional reserve, the OECD expects the
deficit to exceed 3½ per cent of GDP in 2003. While this represents a
broadly neutral stance on a structurally adjusted basis and notwithstanding
the current cyclical slump, the failure to reduce the structural deficit during
recent years of fast growth requires policy to be more rigorous now. In this
regard, the authorities’ decision to seek a 0.5 per cent of GDP reduction in
the structural deficit in 2004 is appropriate. For this to be achieved,
additional measures, including importantly the partial non-replacement of
retiring civil servants, will need to be taken. Once public finances are on a
more sustainable path, a programme of tax cuts could yield a virtuous circle
of higher growth, higher incomes and similar levels of public services.
Eliminating employment
barriers would increase
opportunities for people
out of work and also
bolster fiscal resources
5.
Over the longer-term and in order to minimise the social cost of
addressing the rise in ageing-related costs, policy needs to concentrate on
making more effective use of its resources. In this regard, raising
employment rates and hours worked will help restore fiscal sustainability by
increasing resources available to pay for existing programmes and the
substantial contingent liability represented by France's public pension
systems. France distinguishes itself from other OECD countries by
combining very low youth and older worker employment rates, with higher
than average ones for so-called prime-age workers. Favourable demographic
trends in the recent past and policies designed to assist low-skilled and
inexperienced workers price themselves into the labour market contributed
importantly to the strength of employment growth during the last ten years.
Notwithstanding these successes, more needs to be done to eliminate barriers
that prevent those who wish to work from doing so. Simulations suggest that
a set of policies that succeeded in raising employment rates for youths and
older workers to OECD average levels could raise potential output by 6 per
10
cent and reduce fiscal pressure over the next several decades by as much as
2 per cent of GDP. Moreover, raising the employment rates of younger
workers has the advantage of smoothing the pension burden. While
additional contributions will come on stream precisely when operating
deficits are projected to be growing most quickly, the associated pension
costs will not come due until the middle of the century when the system’s
equilibrium is projected to be improving.
Extending on-the-job
training would help raise
employment levels…
6.
In order to overcome impediments to the employment of youth and
the low-skilled, policy needs to continue to reduce the cost of hiring such
workers. While many state-subsidised employment programmes have limited
impacts on job prospects, some have improved employability for well
targeted population groups. The apprenticeship and qualification contract
schemes have proven a particularly effective means of significantly and
durably improving the employability of low-skilled workers, in part because
of their significant reliance on co-financing on the part of both employers
and employees. By providing inexperienced and low-skilled workers with
private-sector job experience in exchange for lower wages, such programmes
help them price themselves into the labour market, and, at the same time,
acquire valuable and marketable skills. In order that more individuals
currently excluded from the labour market can share in such benefits, access
to these programmes should be expanded.
… as would efforts to
further reduce their
labour costs…
7.
Reducing labour costs of low-paid workers by reducing their social
charges is also a successful strategy for raising employment. Unfortunately,
the cuts in charges implemented since 1997 and those planned during the
period 2003 to 2005 have served in part to offset the additional costs
imposed by the 35 hour work week and the multiple minimum wages created
in its wake. Because cuts in social charges are an expensive option for the
public purse, care must be exercised in the future, to ensure that any
additional cuts really do reduce labour costs.
… by offsetting the hike in
minimum wages
associated with their
harmonisation by smaller
increases later on…
8.
Following the period of harmonisation of the SMICs, the
authorities should restrict further increases in the SMIC to the rate of
inflation for several years, so as to re-establish a downward trend in the
relative labour costs of lower skilled workers and to offset the negative
impact of the planned 5 per cent real increase in the minimum wage. Here,
the earned-income tax credit (Prime pour l'emploi, PPE) could be used, in
combination with more moderate increases in the minimum wage, to lower
labour costs. As long as it is focused only on households presenting a real
social need, such a combination would be less expensive than an equivalent
reduction in social charges. Nevertheless, all low-skill and youth workers
would benefit from increased employment opportunities as the SMIC returns
to more moderate levels.
… and by decreasing the
disincentives caused by
out-of-work benefits
9.
Combating inactivity traps also requires a reinforcement of policies
that promote greater labour force attachment on the part of those out of
work. Here, there appears to be room to improve the effectiveness with
which the locally administered public employment service helps the
unemployed find work. In this regard, proposals to transfer financial
responsibility for the main non-work income support scheme (Revenu
minimum d'insertion, RMI) to the same governmental level that is
11
For older workers, policy
needs to restore financial
incentives to work…
… by dramatically scaling
back early retirement
schemes, and…
responsible for job activation policy is a step forward. Associating financial
responsibility for passive income support with the administration of
activation policy should improve institutional incentives to get individuals
off income support and into work. Moreover, the proposal to complement
the RMI by allowing firms to hire beneficiaries for a limited period of time,
but only pay them the difference between the minimum wage and their
benefit, could be a powerful instrument to create job opportunities and
reactivate such individuals. A careful individualised follow up by the public
employment service will be necessary to minimise the impact of windfall
gains.
10.
The main challenges facing the authorities as concerns older
workers is to cut-back sharply on various state and unemployment insurance
measures that subsidise early labour withdrawal and restore financial
incentives to those that wish to continue working beyond the retirement age.
Existing rules are at the root of low employment among older workers, and
these reflect several decades of policy that explicitly sought to encourage
early labour force withdrawal in the mistaken hope that this would help
reduce unemployment.
11.
In this regard, recent efforts to cut back on state-subsidised earlyretirement programmes should help reduce premature labour market exit.
Similarly, the decision to reduce the extent to which the extended
unemployment benefits offered by the UNEDIC (the unemployment
insurance system) can be used to finance early retirement is welcome,
although more needs to be done. Indeed, by making non-employment a
viable alternative to work for older workers and implicitly subsidising firms
that lay off such employees, the system appears to be a major cause of
joblessness among older workers. More workers 55-60 years of age
permanently exit the labour force on UNEDIC-financed schemes than via
government early retirement schemes. Thus, policy-makers need to eliminate
this programme as a source of job loss, while nevertheless preserving
extended benefits for older workers who genuinely lose their jobs and
providing lifelong training opportunities to workers so that they remain
attractive as employees. Experience-rating firms that disproportionately lay
off older workers would reduce recourse to early retirement by imposing
more of the substantial social costs that such layoffs entail on to those firms
taking advantage of the system. In addition, the responsibility of the social
partners for the broader costs of these programmes would be enhanced if the
State ceased subsidising the scheme by paying the pension contributions of
new entrants to these schemes. Finally, there may be scope for redirecting
money spent on subsidising the non-employment of these workers towards
programmes that reduce their labour costs.
Additional reforms are necessary if workers who wish to work
… making pension income 12.
beyond the official retirement age are to find it financially worthwhile to do
actuarially neutral
so. The authorities' plans to make benefits more actuarially neutral around
age 60 could help raise employment levels by eradicating the existing
massive financial incentive to take one's pension as soon as 40 years of
contributions have been made and one reaches age 60. International
experience suggests that when financial incentives are neutral, a significant
share of people 60 years or older choose to continue working -- resulting in
higher levels of output and higher tax revenues. In this regard, proposals to
12
extend “standard” contribution periods in line with improvements in life
expectancy go in the right direction and should be implemented. Such a
more actuarially neutral system could be further expanded by allowing
individuals to draw reduced benefits at an earlier age.
Policies to promote
investment and fast
growing firms would spur
productivity growth
13.
Economic performance and longer-term fiscal sustainability would
also benefit from higher investment rates and better productivity
performance. Here current efforts to ease the administrative complexity of
the regulatory environment and increase incentives for innovation are
welcome. As regards efforts to stimulate R&D, the establishment of
networks of industrialists and research laboratories to identify promising
technologies for government programmes to support is likely an
improvement over the previous model. However, these programmes need to
be subjected to more systematic evaluation. In this respect, the consistency
of R&D support would be reinforced by increasing the emphasis on the
medium term in the financing and management of laboratories. Furthermore,
R&D remains principally a state-funded activity, and researchers do not have
a large enough stake in the fruits of their discoveries. In order to ensure that
public-sector research continues to become more responsive to business and
societal needs, reforms that reduce rigidities in the allocation of resources
between programmes and research areas should be pursued. The recent
creation of the National Science Fund and the Research and Technology
Fund are reforms that go in this direction. So as to encourage more
investment and thereby further boost potential output, the authorities should
continue to reduce relatively high corporate income tax rates and rigid labour
market regulations. Moreover, cross-country research suggests that a less
onerous taxation of lightly capitalised firms (often smaller fast growing
companies) and a less rigid regulation of employment conditions helps boost
productivity trends by favouring fast-growing high-tech firms.
Better governance of stateowned firms and
continued privatisation
should also help
14.
Overall efficiency would be further enhanced by the pursuit of
privatisation. Although progress over the past twenty years has been
impressive, with the State divesting itself of some 2 000 firms, it still owns
or controls 1 500 companies. Most of these are small, but several very large
firms remain in State hands, and, as a whole, publicly-owned companies
continue to occupy an important place in the business sector. Moreover,
although many of these firms have been commercial successes, the sector's
overall record is marred by a number of failures and large losses. The recent
creation of a new structure (Agence des Participations de l'Etat, APE) to
supervise state commercial assets and to exercise the State’s shareholder
rights should increase transparency and improve the State’s governance of
these firms. However, to be successful the link between state-owned firms
and their ministry-owners will need to be broken and the APE should be
granted more independence from the bureaucracy. A proposal to make
explicit state-owned firms' public-service obligations and transform these
into contracts would enhance transparency and should be implemented. It
could also yield cost savings so long as private firms are allowed to bid for
these contracts. Notwithstanding these efforts, the need for further progress
on privatisation remains. The authorities are proceeding with some more
large-scale divestments, but the very many smaller firms also need to be
transferred to private hands and the State's many minority stakes sold off.
13
Finally, given the projected pressures on public finances, privatisation
revenues need to be applied to reducing the debt or transferred into the
special retirement reserve fund. Too much money continues to be channelled
back into money-losing and inefficient state-owned firms.
To accommodate ageingrelated cost pressures,
spending needs to be
brought under control
15.
Given the ageing of the population and in order to preserve fiscal
sustainability over the medium and long-term without raising taxes, the
authorities will have to do a much better job of controlling the rate of
increase of public expenditure. Indeed, since 1990, a period during which
most OECD countries substantially reduced general government expenditure
as a share of GDP, public spending rose by 3 per cent of GDP in France.
Between 1995 and 2002, however, better expenditure control and the
introduction of expenditure norms for the State Budget resulted in the share
of general government spending in GDP falling by 1.1 percentage points.
This reduction was significantly less than had been forecast by the
authorities at that time. In order to permit them to better meet their fiscal
objectives, public expenditure governance systems need to be improved.
Indeed, the repeated failure to respect multiyear spending objectives reflects
in part the authorities' inability to exercise effective control over that share of
general government spending that lies outside the State Budget. There is a
clear need to introduce reforms that allow the authorities to require all
spending agencies to contribute to expenditure control efforts and at the
same time to confront decision makers more directly with the longer-term
consequences of their actions.
A more medium-term and
integrated approach to
budgeting is needed
16.
To assist policy makers allocate resources effectively, additional
measures are required to raise the visibility of the tradeoffs between State
Budget and other general government expenditures. In addition, the time
frame over which budgetary decisions are made needs to be lengthened, so
as to help prevent pro-cyclical and permanent increases in spending. The
inclusion of the government's medium-term spending plan as an annex to the
State Budget and the almost simultaneous presentation of the Social Security
and State Budgets are steps in the right direction. They should be reinforced,
however, by having parliament vote the plan (currently it is not voted) and
by making the medium-term projections more detailed and better integrated
into both the State and Social Security Budgets. They could then be brought
forward to serve as an umbrella to the two annual budgets, with the out-year
projections serving as a basis for the projections of the following year. If
underpinned by more prudent macroeconomic assumptions than has been the
case in the past, such a scheme would contribute to more realistic mediumterm budgeting by making it more difficult to introduce politically expedient
programmes with short-term gains but long-term costs. Moreover, they
would increase the likelihood that the authorities’ longer term objectives for
public finances are attained.
Moreover, roles and
responsibilities need to be
clarified…
17.
While such a coherent and integrated budgeting system will be
essential to enhancing the authorities' ability to better manage public
expenditures, it is unlikely to be successful unless mechanisms can be found
to ensure that all spending agencies participate in the effort to control
spending levels. The main challenge is to clarify the roles and
responsibilities of the central government on the one hand and those of the
14
various regimes and sub-national governments on the other. Indeed, in many
cases ultimate financial responsibility is poorly defined and does not
coincide with administrative power, resulting in recurrent cost overruns,
weak incentives to improve efficiency and the failure to put in place certain
reforms.
… including at the local
level
18.
The authorities’ plan to clarify responsibilities for programme
delivery at the local level and to transfer financial resources to the level
where programmes are administered is a step in this direction. By allowing
local governments to keep the savings generated, the reform significantly
sharpens incentives to seek efficiency gains and should result in more
efficient programme delivery. However, to generate overall reductions in
spending, mechanisms need to be introduced that guarantee that lower levels
of government assume their share in the overall effort at expenditure control.
Moreover, while reforms that allow municipalities to jointly provide some
services and overcome scale inefficiencies have been broadly successful, the
vast majority of France's 37 000 municipalities are far too small and serious
consideration should be given to their consolidation. While the creation of
various institutions for intercommunal co-operation have helped in this
regard, much remains to be done. Furthermore, the advantages of having
both a regional and a departmental level of government remain to be
demonstrated.
The authorities need to
provide themselves with
the means to ensure that
their objectives are
attained…
19.
For social security, the problem is simultaneously more serious and
more complicated. In so far as the parliament is ultimately responsible for
ensuring overall fiscal sustainability, it may be necessary for it to provide
itself with the means necessary to ensure that the various social security
funds respect the objectives it fixes for them. This could be done while
giving them more liberty to determine the content of programmes and how
they are managed. Indeed, parliament has already assumed some of this
responsibility with the passage of Social Security Budgets since 1996, and
the State Budget support of some social security regimes is already
substantial.. In addition, more needs to be done to reduce the rigidities in
budgetary allocations caused by earmarking and to make the financing of the
schemes more transparent. In order to better ensure that objectives are
realised and so as to make fund management more responsible for financial
outturns, Parliament should include in the social security budget, ex ante
mechanisms designed to correct any eventual overruns.
… and make budget
constraints more binding
20.
Such a measure would help make the budgets of the social security
system more binding and is particularly necessary in the healthcare sector, a
perennial source of expenditure overrun. Unfortunately, experience in all
OECD countries attests that no easy solutions exist. Nevertheless, as
discussed in the 2000 OECD Survey of France, a variety of measures could
help slow the rate of increase of health insurance spending and make the
government’s spending objective (the ONDAM) more binding. In particular,
reform should seek to force administrators, doctors and consumers to take
greater responsibility for the costs their actions generate. In this regard, the
introduction of a rolling cap on ambulatory-care services should help limit
doctors' incentives to oversupply, by making the level of their future
remuneration dependent on respecting the previous year's norms. In addition,
15
softening the threshold effect associated with the means-tested universal
health coverage (couverture médicale universelle, CMU), while at the same
time conferring more of the overall costs to complementary regimes, could
also help by making individuals and their insurance schemes more interested
in controlling costs. Coupled with an increase in the cost actually borne by
patients, such changes, like the decision to reimburse pharmaceuticals at the
price of generic drugs, should exercise additional restraint on the demand
side.
The new State Budget
framework should
increase efficiency…
21.
The newly introduced budgetary framework law (the LOLF), by
placing the emphasis on programme outputs and their regular evaluation,
could constitute an important tool for increasing the efficiency with which
government services are delivered. The law extends to parliament a greater
policymaking role and responsibility for ensuring the population gets value
for their money. However, international experience suggests that, for such
systems to be effective, significant changes in administrative and even
political culture are required, necessitating continued strong political and
administrative support and leadership. Current efforts to involve staff in the
definition of the indicators that will be used to evaluate programmes and the
use of pilot projects to test ideas should both promote a sense of ownership
among public servants and make the final product more relevant. Finally,
given the importance that policy evaluation is to play in directing reform
efforts, it will be critical for programmes to be designed so as to permit
evaluations and for these to be conducted with an eye to proposing
improvements.
… but its output
orientation should be
extended to other levels of
public expenditure
22.
The notion of output oriented budgeting should also be extended to
other areas of public expenditures. In this regard, the creation of a Social
Security Budget has helped to expose such spending to more regular
scrutiny, but the budget needs to be given a more explicit output orientation
and the systems' administrators need to be made responsible for meeting
them. The introduction of performance contracts between the State and the
various social security administrations is a step forward and more should be
done in this vein. Even so, there appears to be significant scope for
efficiency improvement by rationalising the systems' overlapping
contribution collection and benefit distribution networks. The recent decision
to create a one-stop counter for small and medium enterprises goes partly in
this direction by reducing the administrative formalities facing firms.
Finally, as reform of the pension and health systems proceeds, the authorities
should look at the desirability of consolidating regimes and harmonising
benefit systems, for reasons of both social equity and administrative
efficiency.
Efforts are also required
to assure environmental
sustainability
23.
Putting in place policies to ensure the environmental sustainability
of growth is a further challenge facing French policy makers. In this regard,
the authorities should reconsider their strategy for meeting their international
greenhouse gas commitments. In particular, a central role for permit trading
at the EU level should be envisaged and the expensive implicit subsidy of
wind-generated energy reduced to levels consistent with alternative sources
of reductions in greenhouse gases. Opportunities to reduce emissions in road
transportation through higher taxes are limited but tax levels on emissions
16
from sea and air transport are too low (although progress here will require
international agreement). Extensive efforts have succeeded in improving
water quality but were expensive. To improve their cost effectiveness,
existing regulations need to be more vigorously enforced and an effective tax
instrument introduced to control agricultural pollution. In the area of
phosphates and pesticides, regulations need be better aligned with the actual
toxicity of individual chemicals.
To sum up
24.
In sum, after several years of rapid expansion the economy has
entered into a period of below potential growth, with a negative output gap
opening up. Monetary conditions have been relaxed, while fiscal policy has
eased excessively, provoking the European Commission to initiate an
excessive deficit procedure. As uncertainty dissipates towards the middle of
this year, the economy should pick up speed, reaching a growth rhythm of
around 2 per cent in 2004. Nevertheless, over the medium-term in the
absence of substantial reforms, the ageing of the population risks to threaten
economic and fiscal equilibrium. Current pension and healthcare reform
initiatives and plans to redress spending over the medium term go in the
right direction. However, in order to ensure medium and long-term fiscal
sustainability, additional policies to slow the expansion of health and
pension spending are required, while efforts to raise employment rates and
potential output are needed to improve the economy's ability to finance
future ageing-related expenditures. Here, programmes that offer the
possibility of on the job-training should be expanded so as to reactivate
young and low-skilled workers, while reforms to early-retirement schemes
and the pension system need to be continued so as to restore work incentives
for older workers. Ongoing tax and labour market reforms and policies to
facilitate the development of high-tech and fast growing enterprises, which
should help promote investment and higher productivity growth, also need to
be pursued. The opening of the capital of state-owned enterprises, their
eventual privatisation and planned improvements to governance structures
should help promote growth, but revenues from sell-offs ought to be used to
reduce debt. Finally, in order to better manage the totality of public
expenditures, the authorities need to implement reforms that can be used to
ensure that all spending organisms contribute to spending control. Here, it
will be necessary to implement mechanisms that would improve the
effectiveness of measures to control healthcare spending. Moreover,
decision-makers need to be more directly confronted with the long-term
consequences of their actions. Initiatives such as decentralisation and the
new budget framework law should help in this regard. Pursuit of reforms
along all of these lines should permit society to meet the fiscal challenge
posed by population ageing, while retaining high levels of service.
17
18
I. OVERVIEW OF ECONOMIC DEVELOPMENTS AND CHALLENGES
25.
During the second half of the 1990s, the French economy grew strongly, outperforming the
average for both the OECD and the euro area. Between 1997 and 2000 GDP grew faster than potential,
reversing the output gap that had emerged in the first half of the decade. The recovery was sustained by
strong domestic demand, itself supported by tax cuts, an investment boom connected to the stock market
bubble, strong employment growth and, towards the end of the period, a relaxation of fiscal policy. In
common with other European countries, growth was much more job-rich than in the past. This reflected
both important structural measures that reduced labour costs and the 35 hour workweek legislation which
accelerated the reabsorption of cyclical unemployment, allowing the unemployment rate to fall towards its
structural rate. Although firms began to complain of difficulties in recruiting labour and of capacity
constraints in a number of areas, wage growth remained moderate and inflation low. Beginning in 2001,
the increased indebtedness of firms, the end of the stock market boom, the global downturn and a reevaluation of future growth prospects conspired to sharply slow investment activity and exports (Figure 1).
Overall GDP growth moderated less abruptly, partly because consumer and government consumption
continued to grow rapidly.
Recent developments
Growth has been slow in 2002 and early 2003
26.
Since then, activity has remained slack (Table 1). Consumption in 2002 and into 2003 albeit itself
moderate continues to be the main source of what growth persists. This reflects a slowing in household
demand counterbalanced by a strengthening in government consumption in 2002. Investment activity
declined further as some firms cut back on expenditures as a part of efforts to redress their balance sheets,
while others delayed projects in the light of uncertainty both as to future demand and international
developments. Meanwhile, the weakness in world trade has persisted and firms report particularly weak
export demand for intermediate goods. Although employment growth was weak in 2002, it remained
positive and, notwithstanding some very visible plant closures, the unemployment rate has picked up only
moderately, reaching 9.3 per cent of the labour force in May 2003.
27.
The slowdown in demand has allowed the supply side to catch up to the demand side of the
economy (Figure 2). Capacity utilisation rates have declined from historical highs to levels below their
long-term average, and the number of firms reporting difficulties in meeting order and delivery
commitments is down substantially. Overall, the output gap has reversed itself, moving from an estimated
position of 1 per cent excess demand in 2000 to a negative gap estimated at -1 per cent of GDP in the first
half of 2003.
19
Contribution to changes in GDP.
1.4
1.6
0.9
1.7
2.2
-3.4
-3.6
-1.3
-9.8
-0.2
T2
-1.7
-11.0
-5.9
Source: INSEE, quarterly and annual national accounts.
1.
1
-1.4
-6.2
Exports of goods and services
Imports of goods and services
Net exports
0.8
-2.7
Total domestic demand
1
5.3
1.8
1.5
4.5
1.5
0.6
Private consumption
Public consumption
Gross fixed investment
Household sector
Business sector
Government sector
Stockbuilding
2.2
GDP
T1
2001
T4
T1
T2
T3
1.4
0.9
-4.2
0.4
-2.6
3.3
5.2
0.5
2.5
-0.1
0.6
1.8
-0.5
-7.0
-5.6
-0.4
-1.0
0.7
2.6
-1.7
-0.1
-2.9
-2.1
-0.9
20
-0.1
6.3
6.9
2.7
1.1
0.7
5.7
-0.7
-0.1
-1.6
-0.6
2.6
1.0
7.4
4.1
1.3
-0.6
1.7
4.7
-0.7
4.4
-4.6
5.0
2.3
0.1
3.5
3.4
1.1
0.1
1.7
3.0
-2.8
0.2
-3.8
-4.9
1.2
From previous quarter at annual rates
T3
2002
Table 1. Quarterly gross domestic product
Percentage changes
0.1
-2.0
-2.4
-0.3
-1.0
1.7
3.1
-4.3
-0.7
-6.5
-2.8
-0.2
T4
-1.6
-2.4
3.7
2.9
1.4
2.0
0.6
0.9
1.1
0.9
0.7
1.1
T1
2003
-0.2
13.4
15.3
4.5
0.5
2.9
2.8
8.4
3.4
9.7
10.7
4.2
2000
0.1
1.8
1.4
2.0
-0.7
2.8
3.2
2.1
0.8
3.5
-0.2
2.1
2001
0.2
1.2
0.7
1.1
-0.4
1.5
4.1
-1.4
0.8
-2.8
-0.4
1.2
2002
Figure 1. Recent economic trends
%
%
6
5
4
3
2
1
0
-1
-2
A. Real GDP growth
Year-on-year
1997
1998
Annualised quarterly
changes
1999
2000
2001
2002
2003
6
5
4
3
2
1
0
-1
-2
%
%
10
8
10
Private consumption
Public consumption
Investment
External balance
B. Contributions to growth
From previous quarter at annual rates
6
8
6
4
4
2
2
0
0
-2
-2
-4
1997
1998
1999
2000
2001
2002
2003
-4
%
%
3.0
2.5
3.0
C. Consumer price indices
2.5
Year-on-year
2.0
2.0
Headline inflation
Core inflation
1.5
1.5
1.0
1.0
0.5
0.5
0.0
1997
1998
1999
2000
2001
% of labour force
2002
0.0
2003
Year-on-year changes in %
5
4
13
D. Unemployment rate and employment growth
Employment growth (left scale)
Unemployment rate (right scale)
3
12
11
2
1
10
0
9
-1
1997
1998
1999
2000
2001
2002
2003
8
Source: INSEE, Bank of France and OECD.
Investment activity declined
28.
The decline in investment activity and the substantial destocking that characterised the past
18 months were driven by balance sheet consolidation, partly provoked by the collapse of the stock-market
bubble, which made the debt position of some firms unsustainable. Overall, firm debt levels are high,
having reached in 2000 the same levels observed prior to the previous recession (Figure 3). However,
because of lower interest rates, debt servicing charges as a share of value added are much lower than they
were then, and on average the pressure to improve balance sheet positions is less intense now than in the
21
past (the situation with respect to market value is likely considerably worse). Moreover, while total
economy business sector investment volumes remain at high levels, nominal expenditures are close to
average levels, suggesting that affordability is not a major constraint for most firms. Thus, while
international tensions are doubtless contributing to a wait-and-see attitude by some companies, a more
generalised uncertainty concerning demand conditions, stemming from weak economic performance in
Germany and the lack of clear signals from the United States, is also playing a role. Indeed, although
business confidence indicators are weak, they are not exceptionally so and have remained broadly stable
for much of the last 18 months. Indeed, managers' own estimates of future investment prospects, which had
been suggesting a rebound, were borne out by the return to positive business-sector investment growth
during the first quarter of 2003.
Figure 2. Reduced supply-side tensions
%
%
6
6
A. Output gap, GDP and potential GDP growth
5
5
Output gap
GDP growth
Potential GDP growth
4
3
4
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
1990
1992
1994
1996
1998
2000
2002
-4
%
Balance in %
100
90
B. Hiring difficulties
80
90
C. Capacity utilisation ratio
Manufacturing
88
Total industry
Construction
70
86
60
50
84
40
82
30
20
80
10
0
1990
1995
2000
1990
1995
2000
78
Source: INSEE and OECD.
Consumer demand moderated
29.
Strong consumer demand in the period 1998-2001 principally reflected strong income growth as
employment was expanding by 2¾ per cent on average and real wages by 1¼ per cent. Policy factors also
played an important role, with substantial reductions in social charges and personal income taxes
contributing to the progression of disposable income. While the economic slowdown reduced incomes
growth in 2002, a 5 percentage point reduction in personal income taxes had the opposite effect, helping to
limit the slowdown in consumption demand. Looking forward, slower employment growth, relatively
moderate wage growth and the absence of further tax cuts should moderate the pace of income growth.
Notwithstanding the pick-up observed during the first quarter of 2003, limited income growth and the
significant deterioration of consumer confidence should manifest themselves in slower household
consumption growth during the second and third quarters of 2003.
22
Figure 3. Business sector indicators
Index
Balance in %
20
125
120
A. Composite leading indicator (1)
Reincorporated trend
B. Consumer confidence
10
115
0
110
-10
105
-20
100
-30
1996
1998
2000
2002
1996
1998
2000
2002
-40
%
%
50
140
C. Gross debt (2)
D. Debt servicing burden (3)
45
130
40
35
120
30
110
25
100
1980
1985
1990
1995
2000
1980
1985
1990
1995
2000
20
Balance in %
%
15
50
40
30
E. Industrial production and business prospects
Business leaders’opinion
(prospect for own firm)
(left scale)
Industrial production (4)
(year-on-year)
(right scale)
10
20
5
10
0
0
-10
-20
1.
2.
3.
4.
-5
1996
1997
1998
1999
2000
2001
2002
2003
Computed by OECD.
Gross debt over value added of non-financial corporates.
Interest over gross operating surplus of non-financial corporates.
Seasonally-adjusted industrial production index excluding energy and agro-food industries.
Inflation and labour market tensions have eased
30.
Concomitant with the relaxation of demand side pressures and partly as a result of the
appreciation of the euro, the persistent rise in core inflation observed since 1999 began to reverse itself in
2002. Headline inflation, however, continued to be volatile, principally because of large swings in the rate
of growth of energy and food prices (Figure 4). Rising inflation during the first half of the year in France
and elsewhere in the euro zone, partly reflected the introduction of euro notes, notably as concerns the
pick-up of service-sector inflation at the beginning of the year. The acceleration seems to have resulted
from a much larger than usual number of firms revising their price lists at the same time and this seems to
23
have been compensated for by slower price growth afterwards in some sectors, a phenomenon that may
explain the deceleration of prices towards the end of the year. The introduction of euro notes on other
goods was more muted because of agreements signed by large-scale retailers not to raise their prices during
the first several months of the year. Overall the introduction of the euro is estimated to have raised inflation
by between 0.14 (INSEE, 2002) and 0.2 (Bank of France) percentage points, about the same increase as
observed in other euro zone countries. Whatever the initial impact of the introduction of the euro on
inflation, a rapid deceleration in core prices towards the end of the year suggests that competitive pressures
and increasing slack were beginning to have their effect. Indeed, core inflation had slowed to a moderate
1.6 per cent (year over year) by April 2003. Notwithstanding this easing consumers' inflation perceptions
in France and the euro zone have worsened considerably, resulting in a substantial rupture in the historical
relationship between them and actual developments. Indeed, a very large proportion of households feel that
prices have accelerated in the last few months. This, notwithstanding that wage growth remains moderate,
could have unfortunate consequences if these perceptions translate into higher wage demands or reduced
expenditures.
Figure 4. Price developments
%
%
3.0
3.0
A. Consumer price index (1)
2.5
2.5
Headline inflation
Core inflation
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
1997
1998
1999
2000
%
2001
2003
2002
0.0
Balance in %
%
5
40
6
4
B. Components of core inflation (2)
20
Food
Manufactured products
Services
0
C. Household perceptions of
inflation
Inflation perceptions
Actual inflation
4
3
-20
2
2
-40
0
1998
1.
2.
1
-60
2000
-80
2002
1998
2000
2002
0
Year-on-year rates.
Quarterly rates (saar).
31.
In this regard, moderate aggregate wage growth throughout the 1990s, with real wage increasing
in line with or below productivity developments, was a major factor underlying France’s good inflation
and employment performance (Figure 5). The introduction of the 35-hour workweek legislation and the
tightness of the labour market towards the end of the decade brought this to an end, provoking an
acceleration in both monthly wages and more spectacularly hourly wages. This translated into an increase
in the rate of growth of unit labour costs because higher wage growth was only partly compensated by
increases in productivity and lower social charges. The trend towards increasing unit labour costs
24
moderated in 2002, because of a cyclically-based rise in productivity and a slowdown in salary growth.
Nevertheless, despite the growing slack in the economy, costs continued to rise in 2002 more quickly than
in the 1990s, reflecting both a cyclical slowing in productivity growth and, perhaps, some catch-up effects
as wage moderation pacts signed with the adoption of the 35-hour workweek legislation expired. Overall
the rate of increase of unit labour costs has picked up over the past two years, although vis-à-vis other
countries, France's relative cost position in manufacturing has not deteriorated.
Figure 5. Wages, labour costs and competitiveness
Wage and price trends
Year-on-year percentage changes
%
%
4
7
Average monthly rate
Private consumption deflator
3
Hourly wage rate (blue collar workers)
Nominal monthly wage
(all employees)
6
5
4
2
3
Real wage
1
2
1
0
1996
1998
2000
2002
1996
1998
2000
2002
0
Decomposition of increases in unit labour costs
From previous period at annual rates
%
%
10
Unit labour costs
Productivity
(inverted scale)
8
6
8
Labour cost
Average wage per worker
Employers’social
contributions
6
4
4
2
2
0
0
-2
-2
-4
-6
1996
1998
2000
2002
1996
1998
2000
Index 1995=100
2002
-4
Index 1995=100
110
110
Unit labour costs
Relative unit labour costs (1)
Manufacturing
105
100
100
95
90
90
85
80
80
Manufacturing
Non-financial enterprises
70
1.
1996
1998
2000
75
2002
1996
Vis-à-vis 41 countries.
Source: INSEE and OCDE.
25
1998
2000
2002
70
32.
Employment growth throughout the 1990s was stronger than in the past, a trend which continued
in 2002 and 2003. Thus, notwithstanding the slowdown in the economy, employment grew by 0.4 per cent
in 2002 on a labour force survey basis and 0.7 per cent on a national accounts basis. While the continued
strength of employment likely reflects labour hoarding on the part of some firms, it also reflects the
unwinding of excess demand conditions. Thus although the unemployment rate has risen to 9.3 per cent, it
remains close to its structural rate (Figure 6).
Figure 6. Employment and unemployment
%
%
14
14
Unemployment rate
13
13
12
12
11
11
10
10
9
9
Unemployment
NAIRU
8
7
1991
1992
1993
1994
8
1995
1996
1997
1998
1999
2000
2001
2002
2003
7
1991 = 100
%
125
12
Total employment
120
Standardised unemployment rates
April 2003 (1)
France
Australia
United States
Japan
Euro area
115
110
10
8
6
105
4
100
2
95
1992
1994
1996
1998
2000
2002 United KingdomUnited States
Japan
Canada
Italy
Germany
France
0
Thousands
%
14
300
Vacancies, s.a.
Share of temporary jobs (2)
In % of dependent employment
275
12
10
250
8
Subsidised
contracts
225
6
Apprentices
Temporary
4
Fixed-term
contracts
2
200
175
1996
1998
2000
90
2002
92
1.
United Kingdom: February 2002 and Italy: January 2003.
2.
Employment surveys, March data except for 1999 (January).
26
94
96
98
00
02
0
33.
A sharp slowdown in the rate of growth in world trade in 2001 persisted into 2002 and is
reflected in the slowing of exports, which along with the deceleration in total domestic demand contributed
to weaker import growth. These developments, plus falling oil prices in 2001 resulted in an improved trade
balance. The improvement in the current account was less marked because of, among other things,
increased insurance costs following the terrorist attacks in the United States and a reduced investment
income balance, reflecting falling interest rates and smaller dividends on foreign stocks (Figure 7).
Figure 7. Current account balance
Per cent of GDP
3
3
Trade balance
Net investment income
Other invisibles
2
Current account
balance
2
1
1
0
0
-1
-1
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Macro economic policy was relaxed
34.
Economic performance in the recent period was aided by accommodative monetary conditions
and a substantial relaxation of fiscal policy. Short-term market interest rates fell from peaks of more than
5 per cent in late 2000 to around 3.3 per cent in early 2003. Insofar as inflation was rising over this period,
real interest rates fall by even more. More recently, the 12 per cent real effective appreciation of the euro
between January 2002 and May 2003 served to tighten overall monetary conditions somewhat, although
they remain relaxed by historical standards (Figure 8). While calculating real interest rates with core,
instead of headline, inflation suggests a smoother path for underlying monetary conditions, it does not
fundamentally change the overall story.
35.
Fiscal policy relaxed substantially in 2002. The general government budget deficit came in at
3.1 per cent of GDP, representing massive slippage as compared with budget documents, which had called
for an overall deficit of only 1.4 per cent of GDP (Table 2). Only about one third of the overshoot was due
to cyclical factors (the Budget had been predicated on 2.5 per cent GDP growth, an assumption viewed
even at the time as very optimistic and substantially higher than the actual outturn of 1.2 per cent). The
State Budget missed its target deficit by the largest margin (1.3 per cent of GDP), but this included an
unplanned transfers of 0.5 per cent of GDP to various other central government bodies outside the State
Budget and is reflected in the larger than projected surplus for these organisms.1 Taken together, the
overshoot of these central government bodies was nevertheless a substantial 0.8 per cent of GDP, of which
27
0.3 percentage points was due to lower than expected tax revenues. The second most important shortfall
came from the social security system, which recorded a 0.3 per cent of GDP deficit instead of the 0.6 per
cent surplus originally programmed. In contrast, sub-national levels of government actually turned in a
larger than projected surplus.
Figure 8. Monetary conditions
%
%
4
4
A. Real interest rate (1)
3
3
2
2
Deflated by
core inflation
Deflated by
headline inflation
1
1
0
0
1996
1997
1998
1999
2000
2001
2002
Index 1996=100
2003
Index 1996=100
105
105
B. Real effective exchange rate (2)
100
100
95
95
90
90
85
1996
1997
1998
1999
2000
2001
2002
Period average=0
5
4
3
2
1
0
-1
-2
-3
-4
-5
2003
Period average=0
C. Monetary conditions index (3)
Deflated by
headline inflation
Tighter conditions
Easier conditions
Deflated by
core inflation
1996
85
1997
1998
1999
2000
2001
2002
2003
5
4
3
2
1
0
-1
-2
-3
-4
-5
1. Three-month treasury bill, deflated by the indicated price index.
2. Real effective exchange rate calculated with forty-two countries, based on CPI.
3. The monetary conditions index is defined as:
MCI = MCI[t-1] * (1+(r-r[t-1]) + w *(e/e[t-1] -1))
r = real short-term interest rate, deflated by the indicated price index,
e = real effective exchange rate, based on CPI
w = weight based on share of imports to GDP.
The index is shown as a percentage deviation from the period average. A value higher
than zero indicates tighter conditions than on average.
Source: OECD.
28
51.2
44.8
17.1
20.5
5.7
0.8
0.6
53.9
23.5
24.0
9.8
3.7
59.5
Revenues
Total
Tax revenues
State budget
Social security regimes
Local government
Other central government entities
EU
Expenditures
Total
State budget
Local government
Debt
58.5
53.6
23.7
23.7
9.9
3.6
45.5
17.7
20.8
5.6
0.8
0.6
51.8
-1.8
-2.6
0.3
0.3
0.3
1999
57.2
52.7
22.7
23.5
10.0
3.5
45.0
16.9
21.5
5.3
0.9
0.6
51.3
-1.4
-2.5
0.5
0.2
0.3
2000
56.8
52.6
22.4
23.8
9.9
3.6
44.7
16.6
21.5
5.0
0.9
0.6
51.0
-1.5
-2.3
0.3
0.1
0.4
2001
56.3
52.3
44.5
16.6
21.7
4.9
0.8
0.5
50.9
-1.4
-2.4
0.6
0.3
0.2
Budget
59.0
53.6
43.9
15.9
21.6
5.0
1.0
0.5
50.4
-3.1
-3.8
-0.3
0.2
0.7
Outturn
58.8
53.3
44.3
16.5
21.9
5.0
0.9
0.5
50.7
-2.6
-3
-0.2
0.2
0.4
Budget
2003
60.5
53.6
43.8
50.2
-3.4
-3.4
-0.5
0.2
0.3
March
revision
58.9
52.8
44.3
50.7
-2.1
-2.8
0
0.2
0.5
Multi-year
programme
2004
61.4
53.0
43.7
50.1
-2.9
-3.2
-0.2
0.2
0.4
March
revision
29
Source: Ministry of Finance, Budgets 2002 and 2003, Perspectives économiques 2003-2004 (March 2003) and provisional general government accounts (Compte provisoire des
administrations publiques), April 2003.
-2.7
-3.0
-0.1
0.3
0.1
Balance of the general government
State budget
Local government
1998
2002
Table 2. General government accounts
36.
Overall, the revenue shortfall was roughly equal to the slippage on the expenditure side.
Revenues came in 0.8 per cent of GDP lower than in 2001 with most of this accounted for by discretionary
tax cuts programmed earlier. Reforms to the income tax, increases in the employment tax credit (prime
pour l'emploi, PPE), corporate income tax reductions for small business, the suppression of the part of the
"professional tax" applied to salaries and reductions in social security charges linked to the 35 hour
workweek legislation were of particular importance. Discretionary tax cuts totalled 0.5 per cent of GDP,
with the 5 per cent reduction in personal income tax introduced by the government in the summer of 2002
accounting for 0.2 percentage points (2.6 billion euros).
37.
Expenditures were 0.9 percentage points higher than budgeted, reflecting overruns in virtually all
areas. Indeed, even the State Budget sector, which has traditionally succeeded in respecting the spending
norms laid out in Budget documents, exceeded initial estimates by a wide margin. The largest overshoot
came from healthcare spending, which grew almost twice as rapidly as allowed for in the social security
budget (+7.2 per cent as compared with 3.8 per cent). In part this reflected increases (+20 per cent) to the
honoraria received by general practitioners, but also the more general and persistent difficulties that the
authorities have experienced controlling these expenditures (see OECD, 2000 and Chapter III). Large
overruns in the accounts of the unemployment insurance system mainly represented cyclical factors,
although changes to the parameters of the system adopted by the social partners in 2000 had substantially
increased its structural deficit. Spending at the sub-national level of government came in below budget,
principally reflecting the municipal-level election cycle, which sees investment expenditures fall in the
year following an election -- only to rise in following years as new programmes come on line. The
improvement in local government finances arose notwithstanding the introduction of a subsidy to support
at-home long-term care (Allocation personnalisée d'autonomie, APA), which is co-financed by the
departmental level of government, and whose overall take-up was much faster than initially expected.
38.
The 2003 Budget introduced little in terms of concrete measures to deal with the cost overruns of
the previous year. As passed, the budget law predicted a deficit of 2.6 per cent of GDP, based on assumed
growth of 2.5 per cent and inflation (excluding tobacco products) of 1.6 per cent. Additional tax cuts of
about 0.1 per cent of GDP were expected to be partly offset by higher revenues as previously legislated
measures take effect (see Box 1). Similarly, notwithstanding important increases in planned expenditures
in the defence, domestic security and education sectors, the share of overall expenditures in GDP was
projected to fall by 0.5 per cent. This reflected a very strict 0.2 per cent volume increase in State
expenditures and a slower 4.3 per cent rate of increase in social security expenditures (reflecting a
somewhat more realistic expected 5.3 per cent increase in medical expenditures). Despite the beginning of
large-scale retirements and widespread recognition that the civil service is overstaffed, the 2003 budget
called for only limited reductions in staff levels (1 400 overall) or less than 0.2 per cent.
30
Box 1. Recent measures affecting taxes
Background information
Personal income taxes
The 5 per cent cut in personal income taxes put in place in 2002, was confirmed in the 2003 Budget by a
6 per cent reduction in marginal tax rates, for an expected overall budgetary cost of about 3.1 billion euros.
Tax deductions for persons hiring domestic employees were increased at a cost of 74 million euros over
two years.
The "employment premium" (Prime pour l'emploi, PPE), an earned-income tax credit, was doubled in 2002
and reformed in favour of part-time workers at a budgetary cost of 280 million euros. Taken together the
measures are expected to cost 1.1 billion euros in 2003.
Firm-based taxes
The final portion of the "professional tax" charged on salaries was suppressed, at an estimated cost of
1.8 billion euros.
The share of earnings of non-profit organisations subject to the Professional tax was further reduced, at a
cost of 88 million euros.
The cost in 2003 of the progressive elimination between 2003 and 2005 of the Financial institutions
contribution (Contribution des institutions financières), a tax on banking fees is not expected to have a
budgetary impact in 2003 because of an associated tax credit.
Social security contributions
To offset the additional labour costs associated with the harmonisation of the various minimum wages left
after the implementation of the 35-hour workweek, the government introduced a harmonisation of social
security reductions for low-wage earners. This measure, which is to come on line over three years, is
estimated to cost 800 million euros in 2003.
Excise taxes
Tobacco taxes were raised by 700 million euros.
39.
The failure of the economy to recover as the authorities had anticipated, forced them to revise
their forecasts substantially. As a consequence, growth projections for 2003 were reduced in March to
1.3 per cent, the predicted deficit was raised to 3.4 per cent of GDP, and the debt, according to Maastricht
definitions, was projected to exceed 60 per cent of GDP. Following this announcement, the European
Commission took the first steps in its excessive deficit procedure, having taken note that the 3 per cent
limit was exceeded in 2002 and having judged that this did not reflect exceptional circumstances. For the
moment, little has been done to forestall growing fiscal imbalances. While the authorities have cancelled
some 1.4 billion euros (0.1 per cent of GDP) in ministerial credits,2 and created a reserve for a further
2.6 billion euros, they have repeatedly rejected any suggestion that a plan of budgetary rigour be
introduced in the course of this year. They have, however, indicated that the introduction of further tax cuts
will depend on the rate of growth of the economy. Indeed, the revised government forecasts foresee no
important expenditure cuts, nor any additional tax cuts affecting the 2003 Budget year.
31
The short-term outlook
40.
On the basis of these elements, the OECD projects that the French economy, like that of Europe
as a whole, will continue to grow only slowly in the first half of 2003 before picking up towards the second
half of the year. The lack of any additional fiscal stimulus in 2003 and a tightening of policy in 2004 (see
below), plus the relatively slow progression of incomes, will cause household and government
consumption demand to expand less quickly than in the recent past. Meanwhile, the dissipation of
uncertainty surrounding both the international situation and demand conditions more generally should see
firms begin putting into place much delayed investment projects towards the middle of the year. This, plus
a slowing in the destocking process, should help economic activity pick up in the second half of 2003 and
into 2004. For the year as a whole, GDP is expected to increase by less than 1 per cent in 2003 before
accelerating in 2004 to a rhythm of around 2 per cent. In this overall context, the relative insensitivity of
employment to changes in activity is expected to persist, both because hiring difficulties in some sectors
are only now being relieved and because of more classical labour hoarding. Thus, although the rise in
unemployment in 2003 is projected to be moderate, its decline in 2004 -- notwithstanding the pickup in the
economy -- is also likely to be limited.
41.
There is a risk that wage pressures might strengthen during 2003-2005, following the authorities’
decision to harmonise minimum wages towards the highest hourly rate (see Chapter II). This is particularly
likely, if the increase, which will be as much as 11 per cent in real terms over three years for workers
whose firms have not yet adopted the 35 hour legislation, propagates upwards into the salary distribution.
Typically, such exceptional hikes to the minimum wage (coup de pouce) have an only limited influence on
other wages, with the impact falling off rapidly so that individuals earning 120 per cent of the minimum
wage receive (on average) half of the additional hike, while those earning 140 per cent or more of the
SMIC see no increase. However, the overall increase planned this time is much larger than normal and has
been announced well in advance. This increases the likelihood that future increases are taken into account
in wage negotiations and that the boost spills over among those earning more than 1.4 times the SMIC.
Nevertheless, associated reductions in social security charges (see Chapter II) should minimise the overall
impact on labour costs and inflation, though at a cost to the budget.
Fiscal policy in 2003 and 2004
42.
Notwithstanding the creation of a special reserve and the cancelling of ministerial credits
reported above, the OECD projects that the general government deficit will widen in 2003 to about 3½ per
cent of GDP and that government debt on a Maastricht basis will reach some 61 per cent of GDP.
Although the authorities have not yet announced concrete plans for 2004, the March projections included a
forecast deficit of 2.9 per cent of GDP based on a growth scenario similar to that of the OECD's. This
represents a substantial 0.5 per cent of GDP improvement in the structural deficit and is broadly consistent
with the consolidation included in the government's latest multiyear plan. The authorities attribute this
improvement to:
1.
Revisions to eligibility criteria in the unemployment insurance system that they estimate will
generate 2.4 billion euros in savings in 2004.3
2.
A moderate 4 per cent increase in health expenditures (after 6.7 per cent in 2001 and 7.2 per
cent in 2002). The authorities have set up working groups to determine how to achieve this
objective (see Chapter III for more details). Measures already taken include: a reduction in
the reimbursement rate of some drugs of limited medical utility; reforms designed to make
doctors more responsible in their prescription behaviour; and the introduction of
diagnostic-related-group type billing in the hospital sector. These reforms are expected to
generate savings of between 1.5 and 2.5 billion euros.
32
3.
Holding the real value of expenditures in the State Budget constant, as compared with 1 per
cent per annum real growth between 1998 and 2001 and 2.5 per cent last year.
4.
A continued surplus from local government.
43.
For the moment, only some concrete measures have been applied so far and they are unlikely to
yield all of the hoped for savings. In particular, steps to slow the pace of State Budget spending have yet to
be enacted and it is unlikely, given the local-level election cycle, for sub-national governments’ surpluses
to be as high as they were in 2002. Thus, incorporating all of the expected UNEDIC savings and the lower
estimates provided by the authorities for healthcare savings, the OECD estimates that only about half of the
½ percentage point improvement in the economy's fiscal balance, can be expected based on current
policies. To bring the general government account close to balance by 2006 as projected in the authorities’
multi-year plan, will require even larger savings in each of the coming three years.
44.
Although the pension reform currently being worked out between the government and the social
partners and a planned healthcare reform will clearly help relieve fiscal pressure over the medium term (see
below), their impacts are likely to build up relatively slowly and are unlikely to generate substantial
savings until 2005 or 2006. As a result, additional measures will need to be taken, particularly if the
authorities are to maintain a real freeze on state expenditures and restrain the rate of growth of state
medical insurance to 4 per cent (indeed, these grew more than 7 per cent in the first 3 months of 2003).
Press reports suggest the authorities are considering replacing on average only one of every two retiring
civil servants. If limited to central government civil servants, such a policy could be expected to save about
0.3 per cent of GDP each year or 2.3 per cent of GDP by 2009. Coupled with a real freeze in investment
spending and a slowing of other non-transfer expenditures, this could yield the desired savings in 2004,
although it is not clear for how long an investment freeze could be maintained. Extending the partial
replacement of public servants to the whole of the general government would generate even larger savings,
although the government lacks the instruments to institute such a policy.
The challenge of ageing to long-term fiscal sustainability
45.
Looking further ahead much more profound and sustainable savings need to be found. As in the
majority of OECD countries, the ageing of France's population will increasingly place substantial pressures
on the public purse, both because the number of older people will rise and therefore health and pension
spending will increase, but also because the imminent retirement of the baby boom generation means that
fewer people will be working and paying the taxes necessary to finance these programmes.
46.
From a purely fiscal stand point, the ageing of the population will increase the combined
expected funding shortfalls of the pension and healthcare systems by between 6.5 and 9 per cent of GDP4
(taking into account only the purely demographic impact of ageing on healthcare spending). While the
necessity of preventing the general government deficit from reaching such levels is obvious, the problem is
even more serious as these estimates fail to take into consideration debt dynamics. As deficits accumulate,
so will interest payments, reinforcing the shortfall. Extending budgetary forecasts out 50 years and
maintaining the no policy change hypothesis, the debt could grow to more than 250 per cent of GDP and
the deficit to 19 per cent of GDP (Figure 9). While it is obvious that policy makers would not allow such a
scenario to play out, the nature of the debt dynamics is such that the earlier steps are taken to create the
fiscal room necessary to address ageing-related cost increases, the smaller the cost will be for society.
33
Figure 9. Long-term debt dynamics
Per cent of GDP
Deficit
Debt
5
0
250
-5
200
-10
150
Primary balance excluding ageing costs (left scale)
Primary balance (left scale)
Deficit (left scale)
Debt (right scale)
-15
100
-20
50
-25
-30
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
0
2050
Source: OECD.
47.
Policymakers are responding to these pressures on all fronts. Reforms are under preparation or in
place that seek to increase the level and the rate of growth of potential output by increasing labour supply,
upping the rate of investment and by raising the rate of growth of productivity. At the same time, major
reforms are in preparation to reduce future spending pressures. Here, the government has recently proposed
a major reform designed to ensure that over the next twenty years the pension system remains in balance
(Box 2). Moreover, it is has announced its intention to introduce further reforms, aimed at slowing the pace
of rising healthcare costs. In addition, a reform of the State is underway that includes decentralisation
projects, a move towards output-oriented budgeting and various regulatory reforms all of which should
increase the efficiency with which government services are delivered. The details of these efforts and
proposals by which they could be reinforced are discussed in Chapters II (raising employment levels and
investment rates) and III (public expenditure management, pensions and health). The remainder of this
chapter attempts to provide a sense of the macroeconomic and fiscal consequences of progress in these
areas.
Box 2. The government's proposed pension reform
After several years of consultation and analysis, followed by months of discussion with social partners the
Government submitted to parliament in June a bill to reform the pension system. The bill, which is to be
debated and voted in June and July, proposes to:
− Align the period of time that public servants must contribute to the pension scheme before attaining full
pension rights to the same period as for private-sector workers, which is to say, increase it from the current
37.5 to 40 years between now and 2008. And at the same time, the period over which benefits are
prorated depending on years of service will be extended from 37.5 to 40 years in the general scheme.
− Introduce a regular process of revision to the pension system. The authorities envisage increasing
required contribution periods in line with increases in longevity, such that the ratio of years worked to
expected years retired is preserved (currently about 40:20). Concretely, they envisage increasing the
contribution period for both private and public sector workers to 41 years by 2012 and to about 42 years by
2020.
34
− Reduce distortions in the private-sector system by permitting those who continue to work past the point
in time when they acquire the right to draw a pension at the maximum rate to increase their pension rights
in a more actuarially neutral manner, increasing pension rights by 3 percentage points for each additional
year worked. Moreover, the penalty for early retirement in the private scheme will be reduced from 10 per
cent to 6 per cent.
− Over the next decade, progressively introduce into the public-sector scheme a penalty similar to the
one that exists in the private sector for people that take their pension early.
− To set an objective of attaining by 2008 a minimum replacement rate (85 per cent of the SMIC) for
persons having 40 pensionable years to their credit.
These reforms are expected to reduce the expected private-sector system shortfall of 15 billion euros in
2020 by 5 billion. The remaining 10 billion private-system shortfall is to be accommodated by transferring
part of the social insurance charges currently paid to the unemployment system to the pension system
following a substantial hoped for fall in unemployment. Savings from planned changes to the public sector
system are expected to reach 13 billion euros as compared with a projected pre-reform deficit of 28 billion
in 2020.
For the moment no number has been attached to the savings expected from charges to the public-sector
schemes.
Improving potential output could improve prospects
48.
As outlined in this year's Budget, one of the principal challenges facing France is to put in place a
set of policies that ensure that those who wish to work can. France distinguishes itself from other OECD
countries by having among the lowest employment rates for both young and older people but at the same
time having relatively high employment rates for so-called prime-age workers (Figure 10), notably women.
Low employment rates for workers over 55 years of age reflects several decades of policies, put in place by
both various governments and the social partners, that have sought to lower measured unemployment by
encouraging early labour force withdrawal. Indeed, the cumulative impact of those policies has been to
virtually eradicate financial incentives to work beyond 60 and greatly reduce them for those over 55 (see
Chapter II). For youth, rising labour costs brought on by heavy social security charges on the one hand and
a high minimum wage on the other have interacted with a widening of educational opportunities to greatly
reduce youth labour force participation. Indeed, notwithstanding substantial improvements following the
reduction of social charges for low-paid workers, youth employment rates remain low. Chapter II
enumerates a number of policies aimed at reducing incentives for older workers to withdraw from the
labour force prematurely (both state and social-partner financed early retirement schemes) as well as ones
designed to reduce unemployment and non-employment among youth -- by helping them acquire skills and
further reducing their labour costs. While raising youth employment rates will increase their eventual draw
upon the pension system, these costs will only be born towards the middle of the century, when
demographic cost pressures are declining. In contrast, higher employment rates will help assure fiscal
sustainability by raising output and government revenues immediately and throughout the period when
demographic pressures on expenditures are strongest, thereby smoothing the overall profile of public
finances.
35
Figure 10. Employment rates
Per cent
100
100
A. By age, 2001
80
80
France
EU
OECD
60
60
40
40
20
20
0
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
65+
0
70
B. Youths (15-24 years of age)
60
C. Older workers (55-64 years of age)
Men
Women
Men
Women
80
70
50
60
40
50
30
40
20
30
10
1970 1975 1980 1985 1990 1995 2000
1970 1975 1980 1985 1990 1995 2000
Source: OECD.
49.
Substantial benefits would also accrue from policies that raise the level of investment and or
increase the rate of growth of productivity. Higher rates of investment would contribute to an increase in
the stock of capital and faster growth, at least temporarily. So too, would policies that raise the level of
productivity while those that raise the rate of growth of trend productivity would have continuous pay off,
principally in the form of higher standards of living for future generations. The long-run budgetary impact
of higher productivity is, however, less clear. By raising potential output, higher productivity would
increase the resources that the State has available to finance ageing-related expenditures. On the other
hand, it would also have implications for spending -- both because of higher wages and therefore higher
pension benefits (ceteris paribus) and also because demand for medical care, one of the principal
unknowns in any long-term projection of health costs, may be significantly income elastic. Even so, the net
effects would be positive for government finances because, like increased youth employment, the positive
revenue effects will accrue almost immediately while increases in costs will come on stream only slowly.5
Substantial spending cuts are required
50.
The first four sections of Table 3 illustrate the possible long and medium-term impacts on
potential output and public finances of such structural measures. The first section reports a base case
"no-policy change" projection in which the ageing of society slows the rate of growth of employment,
resulting in the rate of growth of potential output declining from some 2.1 per cent in 2002 to an average of
1.5 per cent in the 2020s before increasing somewhat in subsequent decades.6 Trend labour-productivity
growth in this scenario is assumed unchanged from the recent past.7 The net increase in financing costs
36
Table 3. Fiscal sustainability and structural reform
Decade beginning
2010
2020
2030
End point
2040
2050
Annual averages (per cent)
A. Reference scenario
GDP growth
Productivity growth
Participation rate
1.6
2.0
70.4
1.5
2.0
70.5
1.7
2.0
70.6
1.7
2.0
70.9
1.6
2.0
69.1
Primary deficit, no ageing costs
Primary deficit, ageing costs included
Deficit
0.8
-1.2
-4.9
0.7
-2.9
-8.3
0.5
-4.2
-11.9
0.4
-5.2
-16.1
0.3
-5.7
-18.7
77
108
158
225
267
B. Reference plus higher employment rates
GDP growth
Productivity growth
Participation rate
1.9
2.0
72.3
1.8
2.0
72.7
1.9
2.0
75.8
1.8
2.0
78.4
1.6
2.0
79.5
Deficit
0.8
-0.9
-4.5
0.7
-2.2
-7.0
0.5
-3.0
-9.5
0.4
-3.8
-12.5
0.3
-4.2
-14.2
74
97
133
180
209
C. Reference plus higher employment plus investment increases
GDP growth
2.0
1.9
Productivity growth
2.1
2.1
Participation rate
72.3
72.7
1.9
2.1
75.8
1.9
2.1
78.4
1.8
2.2
79.5
Deficit
Debt
Debt
0.8
-0.8
-4.4
0.7
-2.0
-6.6
0.5
-2.7
-8.9
0.4
-3.4
-11.5
0.3
-3.7
-13.1
72
94
126
168
194
D. Reference plus higher employment investment rates and productivity growth rates
GDP growth
2.2
2.2
2.2
Productivity growth
2.3
2.4
2.3
Participation rate
72.3
72.7
75.8
2.1
2.4
78.4
3.0
2.4
79.5
Deficit
Debt
Debt
0.8
-0.7
-4.1
0.7
-1.6
-5.7
0.5
-2.1
-7.3
0.4
-2.5
-9.0
0.3
-2.6
-10.0
70
86
110
138
155
Source: OECD.
from the pension and health schemes is assumed to increase by 6.6 per cent of GDP and is consistent with
COR (2001) reference scenarios where the structural rate of unemployment falls substantially to about 4.5
per cent and the private-sector replacement rates continue to fall because of the 1993 extension to 25 years
of the reference period for calculating benefits. Moreover, the rise in health costs is assumed to be limited
to purely demographic factors i.e. age-specific per capita expenditures grow at the speed of
GDP-- implying a substantial deceleration in health insurance costs as compared with the past. Taking into
account debt dynamics, the end of period deficit and the debt to GDP ratios are estimated by the OECD to
be 19 and 270 per cent, respectively. This assumes that private-sector replacement rates decline by between
9 and 17 percentage points as the impact of increasing the period over which the reference salary is
calculated and indexing this to prices alone. The second scenario brings youth and older worker
37
employment rates to OECD average levels and would raise potential output by 6 per cent by 2050,
temporarily increasing its rate of growth by about 0.2 per cent during the period 2020-2030 and by about
0.1 percentage points afterwards. Overall, the impact on deficits is about 4 per cent of GDP and builds over
time with the difference mainly explained by reduced debt servicing charges due to the accumulation of
lower deficits. The third set of results builds on this by assuming that structural policies succeed in raising
investment rates in the business sector by 2 percentage points, which produces an 15 per cent increase in
potential and a 10 percentage point reduction in the debt. The final set of results shows the cumulative
impact of the previous policies plus a 0.22 percentage point improvement in the ratio of growth of trend
labour productivity which yields a 25 per cent increase in potential output over the whole period and a
further reduction in both end point deficits and debt.
51.
Notwithstanding these substantial improvements in the performance of the economy and the
significant reduction in implicit private-sector replacement rates in these scenarios, both the debt and
deficit ratios remain unsustainable in all cases, emphasising the need for policy to address spending issues
squarely. Moreover, insofar as the State Budget only represents 35 per cent of all public expenditure, a
substantial portion of these savings will have to come from the social security system and the budgets of
the subnational governments. How to co-ordinate such reductions represents a real challenge given the
decentralised nature of public expenditure in France; reforms to improve the authorities’ capabilities in this
regard are discussed in Chapter III. The extent of fiscal consolidation that will be required is illustrated in
Table 4. To be prudent, the first set of results builds in only half of the structural gains modelled in
Table 3. The second set of results shows the expected impacts of a 2 per cent of GDP reduction in the
pension financing requirement by 2020. Although detailed evaluations of the savings to be derived from
the pension reform bill were not available at the end of May, this is roughly equal to the amount of savings
the authorities initially indicated they hoped to generate. This has a marked effect both on projected
deficits between 2010 and 2050 and on the end period debt ratio, although at 130 and 8½ per cent of GDP
they are still unsustainably large so that additional measures are clearly called for. The third simulation
shows that an additional 2.3 per cent of GDP reduction in spending achieved gradually, either in the form
of further pension reform or derived from savings elsewhere in the general government, would be
sufficient to ensure long-term fiscal sustainability. Finally, the last set of results illustrates that moving
quickly can significantly reduce the overall effort required. In this scenario, implementing cost-saving
measures during the first two decades of the century reduces substantially the overall effort needed to
ensure fiscal sustainability.
Action is required soon
52.
The preceding simulations make clear the importance of fiscal consolidation. Debt dynamics and
forthcoming spending pressures are such that unless steps are taken now there is a real risk that the
accumulation of deficits would increasingly force France to cut into programme spending just in order to
service the interest charges on the debt. The simulations that succeed in stabilising overall expenditure are
those which succeed in redressing the deficit quickly and permanently. Although a comprehensive
structural reform programme will help alleviate the burden, neither it nor even the current pension reform
initiative will be enough to ensure fiscal sustainability. Moreover, even if the slowdown in the rate of
growth of the labour force may facilitate a decrease in unemployment, the 45 per cent fall that forms the
basis of two thirds of the projected savings in the private-sector scheme is by no means assured. By the
same token, it is not clear whether the authorities will be able to resist pressure to prevent replacement
rates from declining by the 17 percentage points included in the reference scenario especially if pubicsector replacement rates, which are already higher, do not also decline. Slippage on either front would have
to be compensated for by even more spending cuts elsewhere.
38
Table 4. Impact of spending reform on fiscal sustainability
Decade beginning
2010
2020
2030
End point
2040
2050
Annual averages (per cent)
A. Structural Policies only
GDP growth
Productivity growth
Participation rate
1.9
2.2
71.3
1.8
2.2
71.6
1.9
2.1
73.1
1.9
2.1
74.8
1.9
2.2
76.0
Deficit
0.8
-0.9
-4.4
0.7
-2.2
-6.8
0.5
-3.0
-9.3
0.4
-3.7
-12.0
0.3
-3.9
-13.6
73
96
130
174
202
B. Structural policies plus current pension reform
GDP growth
1.9
Productivity growth
2.2
Participation rate
71.3
1.8
2.2
71.6
1.9
2.1
73.1
1.9
2.1
74.8
1.9
2.2
76.0
Deficit
0.8
0.3
-3.3
0.7
0.4
-4.3
0.5
-1.3
-5.9
0.4
-1.9
-7.6
0.3
-2.2
-8.6
68
76
93
117
133
C. Structural policies, pension reform and with gradual spending cuts
GDP growth
1.9
1.8
Productivity growth
2.2
2.2
Participation rate
71.3
71.6
1.9
2.1
73.1
1.9
2.1
74.8
1.9
2.2
76.0
Deficit
Debt
Debt
0.9
0.5
-2.8
1.0
0.5
-2.7
2.0
0.2
-2.8
2.5
0.2
-2.7
2.6
0.2
-2.6
67
66
66
66
66
D. Structural policies, pension reform with front end loaded spending cuts
GDP growth
1.9
1.8
1.9
Productivity growth
2.2
2.2
2.1
Participation rate
71.3
71.6
73.1
1.9
2.1
74.8
1.9
2.2
76.0
Deficit
Debt
Debt
1.5
1.1
-2.1
2.2
1.1
-1.4
2.2
0.3
-1.8
2.0
-0.3
-2.3
1.0
-0.5
-2.5
64
55
50
50
52
Note: Productivity growth is output per hours worked; employment rate is portion of workforce aged 15-64 employed; ageing costs are
the increase in pension and health care costs and deficits and debt are expressed as a per cent of nominal GDP.
Source: OECD.
53.
The preceding simulations give a notion of the extent of additional savings that will be required.
The rationale for reducing spending and finding margins for efficiency is not to meet some arbitrary goal,
but rather to ensure that future generations will be able to enjoy improved levels of services and living
standards at economically sustainable levels of taxation. Responsibility for deciding how to generate these
savings lies with French society and the politicians who bear ultimate responsibility for the economy.
While the required consolidation is large, it is within reach. Other countries including Canada, Finland,
Italy and Sweden, have achieved as much or more over the last decade. However, to do so will require
much better expenditure management than that which has been observed in the past ten years. As discussed
39
in Chapter III, ongoing efforts to reform the pension and healthcare system, to improve the efficiency of
public spending through decentralisation and the introduction of output-oriented budgeting techniques need
to be complemented by changes that increase the authorities’ ability to influence all of public spending,
including social security and local government expenditures. To do so will require increasing the
comprehensiveness of the budget process and its horizon but also a clarification of the roles and
responsibilities as concerns expenditure containment of both the social partners and subnational levels of
government. Finally, while reducing taxes is likely to help spur growth, priority must be given to
expenditure reduction. Once public finances are on a more sustainable path, a programme of tax reductions
could well yield a virtuous circle of higher growth, and higher incomes with similar levels of public
services. Implemented prematurely, however, they risk exacerbating debt dynamics and making the overall
cost of dealing with the ageing of the population more costly.
40
II. POLICIES TO RAISE POTENTIAL OUTPUT
54.
In order to raise standards of living and ensure the long-term viability of France’s social welfare
system, labour utilisation rates need to be increased substantially and the rate of growth of productivity
raised. As indicated in Chapter I and notwithstanding the strong employment growth of the past several
years, France has among the lowest employment rates in the OECD (22nd out of 30 countries in 2001).
While raising France’s employment rate to OECD average levels -- or even that of the best performers -would not permanently raise the rate of growth of potential output, it would raise the long-term level of
potential and, during the transition period, its rate of growth. Moreover, increased employment would
simultaneously raise taxable income and reduce government expenditures. Such developments should open
the way to improving the sustainability of public finances and creating the kind of fiscal room that would
allow for a reduction in tax rates, which, in turn, might spur further growth (OECD, 2002). To maximise
benefits these efforts will need to be complemented by policies aimed at increasing the rate of productivity
growth, by promoting competition; improving corporate governance of private and public firms; and
raising the quantity and effectiveness of research and development. This chapter examines policies and
recent progress in each of these areas and makes suggestions for further reform.
Growth through resource deepening
55.
Low rates of overall labour utilisation in France reflect three distinct phenomena: very low rates
of youth employment; very low rates of employment among older workers; and low average hours worked.
Indeed, while employment rates of workers between the age of 25 and 54 are, for many cohorts, above the
OECD average, less than one in four French youth work and only slightly more than one in three persons
between 55 and 64 years of age have jobs. Moreover, the average French employee worked only
1 532 hours in 2001, 14 per cent less than the OECD average and 5 per cent less than the average of other
EU countries.
Low youth employment following 30 years of decline
56.
Today’s low youth employment rates are the result of a three-decade long process, during which
the employment rates of 15-24 year olds declined from more than 50 per cent in 1970 to less than 25 per
cent now (Figure 11) as compared with 45 per cent for the OECD as a whole. The fall was progressive
during the 1970s and 1980s and only stabilised during the 1990s, before reversing itself somewhat in the
second half of the decade. Increased youth non-employment coincided with a generalised increase in the
number of years spent in school, reflecting both longer periods of compulsory education and an explicit
policy of broadening access to tertiary education. As a consequence, the educational enrolment rate of the
population 15-24 years of age rose to 67 per cent by 2001. While it is tempting to interpret the decline in
employment rates as a consequence of higher enrolment rates, low schooling costs or even the relatively
underdeveloped system of apprenticeships, the causality is not clear. Similar increases in enrolment rates
were observed in most OECD countries (including many countries with similar institutions) without
anything like the associated decline in activity observed in France.8 This observation, plus the strong
response of youth employment to the recovery of demand and measures to reduce labour costs during the
last half of the 1990s (see below), led at least one official French report (Pisani-Ferry, 2000) to conclude
that economic factors, rather than the increase in enrolment rates, were responsible for much of the decline
41
in youth employment. Moreover, recent research indicates that youth who worked while pursuing their
studies manage to find work much more rapidly than those who do not and suffer less unemployment
(Minni and Brunet, 2003).
Figure 11. Trends in youth employment
Per cent
80
80
Since the 70’s
70
70
15-19 years of age
20-24 years of age
60
60
50
50
40
40
30
30
20
20
10
10
0
1970
1975
1980
1985
1990
1995
2000
80
70
0
80
International comparison, 2001 : 15-24 years of age
70
POL
FRA
ITA
GRC
BEL
SVK
TUR
KOR
CZE
HUN
FIN
ESP
JPN
IRE
PRT
0
DEU
0
MEX
10
NZL
10
SWE
20
CAN
20
USA
30
NOR
30
AUS
40
DNK
40
GBR
50
ISL
50
CHE
60
NLD
60
Source: OECD.
State aid to support youth employment
57.
Until recently, the policy response to low youth participation rates per se has been relatively
muted. Even now, to the extent that younger people are in school, low youth participation levels are not
perceived as a priority policy problem (see for example Holcblart, 2002). Instead, policy has concentrated
on dealing with the high unemployment rates (24 per cent in 2001) of the 30 per cent of this cohort not in
school but in the labour force. Of particular concern are the 7.5 per cent of youth who leave school with no
42
or low educational qualifications and whose subsequent labour market performance is particularly difficult.
For such individuals, a wide range of active labour market programmes has been put in place.
58.
On-the-job training programmes (apprenticeships, qualification contracts and orientation and
adaptation contracts) represent about 60 per cent of aided work aimed at youth. A second set of
programmes aimed at assisting youth enter the labour market is operated in both the business and public
sectors, either through subsiding their employment or through the provision of personalised job-search and
training assistance. All told, some 40 per cent of all working youth are involved in one or another of these
programmes (Table 5), with apprenticeship programmes the largest in absolute terms and public-sector
employment the fastest growing in recent years. Moreover, this share would likely be even higher if those
benefiting from generalised reduction of social security charges for low-paid workers were included in the
total. Overall, the authorities spend about 2 per cent of GDP on various training and subsidised
employment programmes and a further 1 per cent of GDP in the form of tax expenditures associated with
the reduction of social charges. Even though these reductions are not restricted to youth, younger people
represent a large share of those benefiting from reduced social charges. The effectiveness of these
programmes varies. Generally, those which provide participants with private-sector work experience and
which include a significant amount of co-financing have the most success in improving employability.
Thus, the various apprenticeship and employment qualification programmes have proven to be successful
mechanisms for helping less skilled youth find a place in the labour force. Virtually all participants remain
in employment within the private sector following the end of their training.
Table 5. Employment programmes for youth under 26 years of age
1996
1998
1999
Thousands
On the job training
Apprentices
Qualification contracts
Business sector (excluding on the job training)
Employment initiative contracts (CIE)
Employment reintegration contracts (CRE)
First job assistance for youth (APEJ)
Part-time abatements
First employee social charge exemption
Other
Public sector
Jobs for Youth
Employment solidarity contracts
Consolidated employment contracts
City employment contracts
Total
Total excluding apprentices
473
315
158
345
74
9
50
157
33
22
109
96
9
4
927
612
543
352
191
321
66
5
0
192
31
27
160
85
60
10
5
1 024
672
573
374
199
337
49
2
0
229
35
22
192
130
51
9
2
1 102
728
2000
2001
603
383
220
301
38
0
0
208
35
20
199
150
39
9
1
1 103
720
609
385
224
216
26
0
0
138
34
18
194
156
29
9
1 019
634
39
26
36
22
1
Per cent
Share in total youth employment
Share of youth employment excluding apprentices
1.
38
25
Data represent the stock of recipients at the end of year.
Source: DARES.
43
41
27
40
27
59.
The efficiency of other measures is less clear. Indeed, the Youth Employment programme
(emplois jeunes), which itself employed 213 000 youth (12 per cent of all jobs held by 15-24 year olds)
proved disappointing as a transition towards permanent private-sector employment. Despite concentrating
assistance on individuals with relatively high educational qualifications, it failed to provide the kind of job
experience that improved their chances of finding private-sector work; only one in three found work before
their contract ended and only one in twenty did so in the private sector.9
60.
Evaluations of the overall success of the “Access to Employment” (Trajet d’accès à l’emploi,
TRACE) programme are more positive, although because it involves public-sector jobs it is less likely to
provide participants with marketable skills. This scheme, which focuses on youth (16-25) with limited
educational qualifications and from socially troubled backgrounds, has been successful in establishing a
contact between participants and the labour market. Although it has not been subject to a statistically
robust evaluation, it appears to have been effective in channelling participants into employment. Almost
one in two participants is employed after leaving the programme (albeit 30 per cent of these within the
context of a state employment programme), and the unemployment rate of participants, while still high at
37 per cent, is half that of their unemployment rate when they enter the programme (Mas, 2002). Tests of
the effectiveness of the Fresh Start programme suggest that, with the notable exception of long-term
unemployed youth, it has had some success in improving both the speed and rate with which the
unemployed find work for most categories of workers (Micheau, Poujolly and Pommier, 2001).
61.
In order to re-orient resources towards assisting those most at risk and to improve participants’
chances of finding long-term employment in the private sector (thereby reducing dependency on statefinanced jobs),10 the authorities decided to cease issuing new emploi-jeunes contracts and instead increase
assistance to private-sector firms hiring unemployed youth with low educational qualifications. Preexisting emplois jeunes contracts will be allowed to run their course, leading to the eventual extinction of
the programme in 2007, although some such posts, which fulfil a real need in the educational and nonprofit sectors will continue to be funded. The new youth “Youth contracts” (contrats jeunes) programme
provides private-sector employers a complete exoneration of social charges during two years and a 50 per
cent exemption in the third year for each qualifying youth it employs in a full-time contract. The
authorities signed some 44 000 such contracts in 2002. Reflecting the recentness of the programme, a
significant proportion of these contracts have been accorded to individuals already employed, thus net job
creation rates are doubtless much lower11 (Zamura and Zoyem, 2003). As the programme reaches maturity,
however, these rates should improve. In 2003, the authorities hope to sign a further 120 000 contrats
jeunes. Nevertheless, the transition from the emplois jeunes to the contrats jeunes programme should
reduce the total number of subsidised employment in 2003.
62.
Programmes to promote employment are, of course, not limited to youth. Similar schemes are
available to other age-groups (including in some cases youth). The largest of these include solidarityemployment contracts (contrat emploi solidarité, CES), which were designed to improve the employability
of individuals experiencing or likely to experience difficulty in finding employment12 and insertion and
training internships (Stage d’insertion et de formation à l’emploi, SIFE). In addition, the authorities operate
the “Fresh Start” labour market insertion programmes and, in cooperation with the UNEDIC, a return-toemployment preparation scheme (Plan d’assistance au retour à l’emploi, PARE). The second of these
programmes requires unemployment insurance beneficiaries to enter into a job-search and training
programme with the public employment service as a condition for receiving benefits, while the first
programme offers similar services to individuals requesting them, who meet certain criteria.
63.
Generally, these programmes have also been criticised for yielding limited improvements in the
employability of participants. In this context, the Cour des Comptes was especially critical of so-called
consolidated employment contracts (Contrats d'emploi consolidé, CEC), which "appear to be attributed in
an effort to lower the rate of unemployment". It found that beneficiaries received neither the training nor
44
individualised assistance provided for in the legislation, and that only 6.6 per cent of participants found
work with a permanent contract. On the other hand employers -- principally local governments, hospitals
and schools -- are satisfied given the heavy subsidisation of these jobs (8 500 euros per head or 44 per cent
of the labour cost of a worker paid at the SMIC). Similar results were found by Berger et al., (2001) for
both the CES and SIFE schemes. The overall effectiveness of the PARE programme has been called into
question because of coordination problems between the UNEDIC, which pays unemployment insurance
benefits, and the public employment service (PES), which is charged with enforcing the PARE contracts.
In particular, some observers argue that the culture in the PES remains oriented to assisting individuals
take advantage of state programmes, rather than to help them find or even coerce them into finding work.
As a result, PES employees have not always enforced the contracts as vigorously as they might have and
job seekers are not receiving a close enough individualised follow up. As a result, the programme is less
likely to yield important improvements in participant’s employment prospects. Following these
evaluations, the authorities have indicated their intention to consolidate a number of aided employment
programmes with a view to improving their performance. Such consolidation would provide a useful
opportunity to rethink existing schemes, reduce their complexity and focus on those which seem to be the
most effective in ensuring a transition to more permanent and fiscally sustainable employment.
Reducing labour market rigidities
64.
Over the past several years, the authorities have taken a number of steps in an effort to reduce
rigidities in labour markets. In this regard, efforts undertaken during the past decade to reduce impediments
to interim work and fixed-term contracts have played a role in the improvement in youth labour market
performance. Such work forms allow workers to sample various careers and employers, while providing
firms with the opportunity of testing the suitability of a prospective employee to a given task. Indeed, such
contracts represent 75 per cent of total youth employment and official estimates suggest that they serve as a
bridge to a permanent contract in 25 to 33 per cent of cases. While such jobs are less stable than permanent
contracts, 75 per cent of those with a fixed term contract are employed a year later in contrast to the twothirds of unemployed who remain out of work (Cancé and Fréchou, 2003)13. In addition, the 35 hours
workweek legislation included a number of measures designed to increase firms’ ability to respond to
seasonal and cyclical fluctuations in the demand for their products. Thus, in the case of branch or firmlevel negotiations, in exchange for reducing hours worked, firms were allowed to redefine working time
and to move towards an annualisation of working-time so that employees' work schedules could be more
easily adapted to peaks and troughs in production. Indeed, the authorities hoped that these reductions in
rigidity would help spur productivity by enough (together with cuts to social security costs) to compensate
any net increases in hourly labour costs posed by the reduction in working time. Moreover, some argue
(Bathélémy and Cette, 2002) that by encouraging firms and sectors to negotiate branch level agreements
the reform contributed to the establishment of more cooperative forms of labour relations, less reliant on
rigid national regulations that necessarily fail to take into consideration firm and sector-specific factors.
65.
Unfortunately, several reforms served to increase rigidities, either by reducing the room that
firms have for manoeuvre or by imposing additional costs. These include new constraints introduced on
part-time employment in 2000 that require such workers to be paid an ‘overtime’ premium of 25 per cent if
they work more than 110 or 133 per cent of their contracted working time. Even more penalising are rules
that would require the hours in a part-time contract to be revised upwards if actual hours worked during
12 weeks of a 15 week period exceed contracted hours two or more hours per week. Such changes make
these kind of work forms, which for many youth are effective bridges towards full-time employment, more
expensive and less attractive to firms.
66.
More directly, the 35-hour workweek reduced both individuals’ and enterprises’ options by
imposing further restrictions on working time, raising labour costs and exacerbating production bottlenecks
and labour shortages, at least temporarily (Leclair, 2002). While generally appreciated by the population,
45
low-income workers tended to begrudge the working-time limit because it prevented them from increasing
their incomes by working additional hours. As recognition of these problems grew, the authorities
modified the initial 35 hours legislation -- mainly in the manner in which it was implemented. Already in
2001, recognising the particular hardship that the law would impose on small-and medium-sized
enterprises, the government extended the deadline before which small and medium-sized enterprises had to
conform to the new lower overtime hours contingent.14 More recently even more steps have been taken. In
particular, the overall monthly contingent (total hours, including overtime, authorised by the law) was
increased by 50 hours, effectively raising it to the same level as prior to the 35 hours legislation. Moreover,
the authorities also reduced from 25 to 10 per cent the overtime premium that small and medium-sized
firms have to pay for the 36th through 39th hours (it remains 25 per cent for larger firms and for overtime
hours in excess of the 39th weekly hour). Thus, although the relaxation of rules relieved employers and
employees from the physical constraint imposed by the previous legislation, it nevertheless falls short of a
return to the status quo ante as firms will still need to pay an overtime premium on the 36th through 39th
hour, which was not the case under the 39-hour workweek. The overall impact on costs remains unclear
however. Firms' recourse to overtime has diminished significantly, perhaps reflecting increased use of the
annualisation of hours (made possible by the 35 hours legislation) in dealing with fluctuations in demand,
instead of overtime. Box 3 summarises the overall impacts of this programme.
67.
The authorities have also taken steps to reduce the rigidities imposed by the Social Modernisation
Law (loi de modernisation sociale), which -- among other things -- imposed a number of new requirements
on firms undertaking layoffs for economic reasons. The government considers that the law was passed
without sufficient consultation with the social partners and that its negative economic impacts would be
reduced if it better reflected sectoral and local conditions. As a consequence, they have moved to suspend,
for an initial period of 18 months, several of the more constraining measures that were introduced by
decree and have held off putting into force several others. Measures affected include those :
−
Requiring social and territorial impact studies be included in "employment preservation" plans
(plans de sauvegarde de l'emploi).
−
Imposing separate staff consultations for both restructuring plans and employment preservation
plans.
−
Giving works councils the right to oppose restructuring plans, to undertake independent reviews of
companies’ books and imposing mediation.
−
The introduction of a rule preventing the use of the professional competence of employees as a
criterion in determining the order of layoffs.
−
Increasing the powers of the labour inspectors.15
−
Permitting a reduction from 10 to 6 per cent of the premium imposed on firms by the Social
Modernisation Law when a fixed-term contract expires, if social partners agree and if laid-off
workers are given access to special training.
68.
In the interim, the authorities invited the social partners to negotiate rules in each of these
domains. Following the completion of such discussions, the government has indicated that it intends to
present a new draft law reflecting these agreements and extending, if necessary, the suspensions of the
Social Modernisation Law until such time as the new legislation enters into effect. Additional changes
aimed at reducing rigidities in the labour market include: changes designed to reduce the incidence of
unfounded moral harassment cases and marginal increases in the range of jobs where fixed-term contracts
are permitted.
46
69.
Finally, following the emergence of a substantial deficit in the budget of the unemployment
insurance system, the social partners introduced a number of reforms, most important of which were:
−
A 20 per cent increase in associated charges (from 3.4 to 4 per cent for employers and from 1.8 to
2.4 per cent for employees).
−
A reduction of the duration of benefits for older workers, aimed both at reducing chances for
abuse and making savings.
−
An increase in the pension fund contribution required of unemployment insurance beneficiaries
(unemployment insurance beneficiaries continue accumulating pension rights).
−
Eliminating the pre-existing possibility for a worker 55 years old to collect benefits of 70 per cent
of his or her previous net salary for up to 10 years.
−
In addition to a doubling of employer and employee contribution rates (agreed in June 2002), an
agreement to review the very generous arrangements in the special regime for entertainment
industry workers. The number of beneficiaries under this scheme has doubled since it was
introduced in the early 1990s and its payments exceed total contributions by more than 800 per
cent.16
Box 3. Evaluating the employment impact of the 35 hours legislation
The reduction in the legal working time from 39 to 35 hours was certainly the most visible labour market
reform of the past several years. Unfortunately, a definitive answer to the question of whether or not it
contributed to a sustained increase in employment remains elusive. In part, these difficulties reflect the
recentness of the reform, but they also reflect the fact that rather than a simple reduction in the legal hours
worked, the policy comprised several separate initiatives, each likely to engender employment effects.
These include:
-
The reduction in legal working time.
-
The associated reduction in social charges (viewed in a budget neutral manner).
-
The purely Keynesian demand component of these tax reductions.
-
The opportunity to reduce rigidities in the organisation of working time.
To date, no comprehensive study has been conducted that seeks to isolate the impact and influence of
each of these effects, as well as the complications introduced by the fact that the policy was introduced
during a Europe-wide cyclical upswing. Some studies (Rouilleault, 2000) have sought to analyse the
35 hours legislation taking into consideration selection bias. Indeed, the likelihood that firms that were
1
going to increase employment anyway and adopted the legislation early, while those facing more sombre
2
prospects did not, makes perilous even detailed comparisons of the relative employment performance of
firms having adopted the 35 hour regime as compared with those that have not.
Despite these technical, but real, problems, a consensus of sorts has emerged as concerns the short-term
effects of the policy.
47
- Research to date seems to concur that the initial expectations for the reform were greatly exaggerated
and that even over the short-run somewhere between 150 000 and 300 000 (potentially temporary) job
creations between 1997 and 2001 might be attributable to the programme, substantially less than initial
estimates of 600 000 or more.
- Those firms who moved first under the Loi Aubry 1 and which were required to commit themselves to
increase employment in exchange for financial aids have had the strongest employment growth and,
indeed, the employment behaviour of firms that moved to the 35 hour regime in later years is very difficult
to distinguish from firms that remained on 35 hours (Crépon, Leclair and Roux, forthcoming).
- The move to a shorter workweek during a strong cyclical upturn helped increase the speed at which
cyclical unemployment was reabsorbed but also increased labour-market tensions and contributed to
production bottlenecks -- at least during the transition period (Leclair, 2002).
- For the moment, even though the unemployment rates declined over this period, there is no evidence
of a reduction in the structural rate of unemployment as a result of the policy.
- In contrast to the reduction of social charges prior to 1997 which helped to raise employment levels,
those introduced with the 35 hour workweek served to offset the additional costs associated with higher
hourly earnings.
-
For the moment, little is known about the programme’s long-term effects.
---------------A minimum engagement vis à vis employment was a pre-condition to benefit from the financial
incentives associated with the Loi Aubry I scheme.
1.
2. The fact that the timing of companies' adhesion to the new norm was voluntary and that individual
firms' decisions likely reflected the relative costs and benefits of adopting the new regime. A priori one
would expect that those who intended to increase employment anyway would have adopted the new
legislation earlier than those that expected to decrease, in order to benefit from the financial incentives
offered or the possibility of renegotiating working rules. Indeed, this is observed in those studies that do
correct for selection bias (Jugnot, 2002; Bunel and Jugnot, 2002). By the same logic those planning layoffs
or in financial difficulty would have delayed in order to avoid the additional costs of raising hourly wages.
As a result, comparing employment developments of firms that did move with those that did not adopt the
legislation may give rise to false results, the reason that correcting for selection bias is so important.
Lowering the labour costs of low paid workers.
70.
A further major strand in the authorities’ efforts to increase employment over the past ten years
has been a policy to reduce labour costs of the low-paid, while at the same time preserving work incentives
in the context of relatively high social assistance payments for certain classes of workers. Indeed, the
combination of a high cost of unskilled workers (Figure 12) and a social assistance system that provides a
substantial non-earned income for a significant number of households poses an important policy challenge
and contributed to very high rates of non-employment among the low skilled.17
71.
Policy has responded over the 1990s by reducing the social charges that firms pay on the earnings
of the low paid. Overall, the policy has been very successful in improving the employment prospects of
both youth and older workers with limited educational qualifications. Thus even though the minimum
wage (Salaire minimum interprofessionnel de croissance, SMIC) has risen in recent years to reach some
52 per cent of average wages, large cuts to the social charges that firms must pay when hiring such persons
have reduced the relative labour costs of such workers to about 42 per cent -- about the level observed in
48
1974, when the process of disemployment began in France. Since then and notwithstanding successive
hikes to the SMIC, additional reductions to social charges has meant that relative costs of low-skill
workers to firms have been more or less stable since 1998. Econometric estimates suggest that about 400
000 jobs were created by the reduction in charges during the period 1993-97 (Crépon and Desplatz, 2001),
which accords well with the observation that during the period 1990-1999 non-aided private-sector fulltime employment of workers earning between 1 and 1.4 times the SMIC increased by 667 000 or 17 per
cent.18 The result is all the more encouraging because during the same period non-aided full-time
employment in the private sector actually declined by almost 1 per cent (Panel B, Figure 13). An earnedincome tax credit (Prime pour l’emploi, PPE) introduced in 2001 (see OECD, 2001) has served to further
raise low-income workers' take-home pay, while leaving their labour costs untouched. As a result, their
incomes relative to those of an average worker have increased even more. Initially introduced at a
relatively low level of about 230 euros the prime pour l’emploi was raised to 460 euros in 2002 and to
558 euros in 2003.
Figure 12. Minimum wages(1)
In per cent of full-time average wages
1.
2.
Korea
Spain
Hungary
Czech Republic
0
United States
0
Japan
10
Portugal
10
Poland
20
United Kingdom
20
Canada
30
New Zealand
30
Netherlands
40
Belgium
40
Luxembourg
50
Ireland
50
Australia
60
France
60
Data are for 2000 and concern full-time workers.
The ratio of average wages of all workers to those of full-time workers were assumed
to be the same in all regions.
Source: OECD.
72.
The trend towards reducing the labour cost of low-paid workers is destined to slow or come to an
end over the next several years as the authorities intend to substantially increase the average minimum
wage over the next three years. This increase follows the creation of what are effectively 6 different hourly
minimum wages, where the wage currently received depends on at what point in time a worker’s employer
signed a 35 hour workweek agreement (if at all). Those who moved to the 35 hour regime most recently
have the highest hourly minimum wages, while those that moved earlier have lower ones and those who
stayed at 39 hours the lowest. Those working for firms that never signed a 35 hour workweek deal earn
11.4 per cent less than those who moved after July 2002. The authorities have decided to adjust the various
scales so as to return to a single SMIC by July 2005, by raising all the various hourly minimum wages up
49
to that of the highest. In order to limit the overall increase, the reference rate during this period will be
increased only by the rate of increase of inflation. All told, the average hourly SMIC should rise by 6.3 per
cent in real terms between 1 July 2002 and 1 July 2005. For the vast majority of firms (90 per cent), and
about half of employees paid the SMIC,19 the increase in real wages will be the higher 11.4 per cent. In
addition, unemployment insurance premia are to increase by 0.6 percentage points in July 2003, half of
which will be at the expense of firms.
Figure 13. SMIC, take-home pay, labour and employment
%
%
60
60
Relative labour cost and take-home pay at the SMIC
Take home pay plus ’’prime pour l’emploi’’(1)
Take home pay (2)
Labour cost (3)
55
55
50
50
45
45
40
1970
1975
1980
1985
1990
1995
2000
Thousand
2005
40
Thousand
6000
6000
Full-time unaided employment by income
5000
5000
1990
1995
1999
4000
4000
3000
3000
2000
2000
1000
1000
0
<1.5
<2
<2.5
<3
<4
>4
Multiples of the SMIC
0
1.
After tax earnings of a person earning the SMIC and receiving the “prime pour
l’emploi” (PPE) as a per cent of after tax without PPE earnings of an average
production worker (APE).
2.
After tax earnings of a person earning the SMIC as a per cent of the after tax
earnings of an APW.
3.
Labour cost including social charges of hiring a worker at the SMIC as a per cent of
the same costs for an APW.
Source: OECD calculations using INSEE data.
50
73.
In an effort to limit the impact of this substantial increase in minimum wages on firms’ overall
labour costs and in order to simplify the rebates afforded to firms hiring low-paid workers, the authorities
have decided to harmonise the various abatements on social charges. At the same time, they will increase
the maximum abatement to which a firm still on 39 hours is entitled and extend the coverage to all
enterprises and to all workers earning between 1 and 1.7 times the hourly reference SMIC -- independent
of the number of hours worked. The authorities will also eliminate the general abatement of about
650 euros, which was applied to all employees of firms that signed a 35 hour package, independent of
salary levels including those in excess of 1.7 times the SMIC. As a result of these changes, the reduction in
social charges on low-paid workers will increase for all workers earning between 1 and 1.4 times the SMIC
as well as for those 46 per cent of employees whose firms have yet to move to the 35 hour workweek
(Figure 14). The elimination of the general rebate will help pay for the new measure, reducing its overall
additional budgetary cost to about 800 million euros, but it will do so at the expense of firms with more
qualified staff who will no longer benefit from the generalised reduction associated with the 35 hours
legislation. Overall tax expenditures in the form of lower social charges represent some 15.3 billion euros
in foregone revenues or 1 per cent of GDP in 2003.
Figure 14. Harmonising minimum wages and low-wage worker social security reductions
Reduction as % of salary
Share in employment
Reduction as % of salary
Share in employment
30
30
Business-sector unaided
employment by salary
25
25
2005 harmonised (4)
20
20
15
15
10
10
Aubry II (2)
Aubry II (3)
5
5
All
firms (1)
0
0
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
Salary measured in multiples of the SMIC
1.
Reduction currently available to all firms, ''Ristourne Juppé''.
2.
Reduction available to firms having adopted a 35-hour workweek contract between
01/07/1999 and 30/06/2000.
3.
Reduction available to firms having adopted a 35-hour workweek contract after
01/07/2002.
4.
Reduction after harmonisation.
Source: Ministry of Economy, Finance and Industry; DARES.
51
74.
As compared with the previous system of rebates, the new one has several benefits:
−
It offers the same degree of incentives to part-time and full-time workers, whether they are
working 35 or 39 hours per week
−
It reduces the effective cost of overtime because the reduction is calculated on the basis of hourly
wages and applies to the whole of monthly earnings. This should allow low-paid part-time
workers to increase their incomes by working longer hours, if the employer desires.
−
It reduces the effective rate of taxation on salaries in the neighbourhood of the SMIC for firms
still at 39 hours and thereby reduces the risks of creating low-wage traps.
−
It progressively increases the extent of the rebate to 26 percentage points in 2005 for firms still at
39 hours and extends it to a much wider population by increasing coverage to those earning as
much as 1.7 times the SMIC -- i.e. over 60 per cent of workers.
75.
While firms that have not yet moved to the 35 hour workweek will benefit from a significant
reduction in charges (previously they only received the Juppé rebate), such firms will see the largest
increase in SMIC and the net impact will be a 5.5 per cent real increase in labour costs. Firms that moved
earlier will benefit less from the new tax regime for low-paid workers but, because they already pay higher
hourly minimum wages, they will be less negatively impacted by the harmonisation of the SMICs. Overall
and including the 0.3 percentage point increase in unemployment insurance premia to be paid by firms,
among firms that have already moved to 35 hour regime real wage costs will fall for those that moved most
recently and rise by as much as 5.5 per cent for those who switched regimes before 1999 (Table 6). The
overall impact on unit labour costs and therefore firm-level competitivity will be reduced to the extent that
productivity rises. Nevertheless, the relative competitiveness of firms employing a large share of low-paid
workers will be reduced.
Table 6. Expected change in labour costs for minimum-wage workers
No 35 hour pact signed
35 hours before July 1999
35 hours between July 1999 and 2000
35 hours after July 2002
Increase in
real salary
Impact of harmonised
social charge
reductions
Increase in UIrelated social
charges
Change in
real labour
costs
11.4
4.9
3.6
1.8
0.6
0.0
-6.5
0.3
0.0
-1.0
-1.8
-2.1
0.3
0.3
0.3
0.3
0.3
0.3
5.2
5.5
3.9
1.1
-0.9
-1.8
Source: Ministry of Economics, Finance and Industry.
Assessment
76.
Globally the rapid increase in youth employment over the 1990s stands in sharp contrast to
previous decades and, although this was a period of strong economic expansion, similar pick-ups in
employment levels were not observed during previous cyclical episodes. To a large extent, the
improvement reflects the substantial resources that have been put in place to support youth employment,
although the abolition of compulsory military service for young men probably served to raise civilian
52
youth employment rates during this period.20 The share of GDP spent on youth-oriented programmes
increased by 62 per cent between 1992 and 2000, reaching 0.4 per cent, substantially more if tax
expenditures in the form of reduced social charges for low-skilled workers were to be included. On a
purely mechanical basis, the employment impact of subsidised employment programmes and the increase
in part-time employment was large, both in the private sector (particularly apprenticeship programmes) and
in the public sector (emplois-jeunes). Indeed, while business-sector employment expanded by 7 per cent
between 1990 and 1999, more than all of that increase came in the form of state-aided and part-time
employment as unaided full-time business-sector employment actually fell by 1 per cent over the same
period.
77.
Given the substantial resources allocated to these policies, it is essential that the authorities
develop a firm sense of the relative effectiveness of programmes. The Ministry of Labour and Solidarity
regularly follows up on the labour market performance of programme participants and publishes much of
its research. This is laudable, but more needs to be done to make these evaluations statistically robust and
policy relevant. More of these studies should control for the characteristics of programme participants in
such a way as to determine the programme's net impact on the employability and salaries of participants.21
Moreover, as discussed in Chapter III, in order for such studies to contribute to the improvement of policy
effectiveness, they should include analyses of the strengths and weaknesses of schemes and prescriptions
for reform. While a certain number of such studies are conducted, their scope and frequency need to be
increased. Failure to do so runs the risk that large sums of money will continue to be spent on policies with
small or no labour market impact, while more effective ones are starved of funds or are never
implemented.
78.
The French labour market continues to be challenged by the high labour costs of low-skilled
workers on the one hand and the significant work disincentives generated by various non-work benefits.
The reduction of social charges during the past decade has gone a long way to addressing this challenge,
but at substantial cost to the public purse. Moreover, the combination of hikes in the SMIC, increases in
unemployment insurance charges and rising hourly wages because of the 35 hour legislation tend to raise
the relative labour costs at the level of the SMIC notwithstanding measures designed to prevent this, such
as the additional cuts in social security charges associated with the 35 hour workweek and more recently
those associated with the harmonisation of the various SMIC. This suggests that the positive employment
impact that the original reductions have had may have come to an end.
79.
In order to ensure that the past period of employment-rich growth continues, additional steps to
reduce labour costs for low-skilled and younger workers are required. In this regard, in order to allow
projected increases in the relative cost of low-paid labour following the harmonisation of the various
SMICs to dissipate, the authorities may wish to substitute increases in the employment tax credit for
additional coups de pouces in the post 2005 period. Such a policy would allow relative labour costs to
moderate and return to the levels observed in the mid 1990s, while allowing the revenues of low-paid
households to keep pace with those of average workers. Moreover, steps should be taken to increase the
targetting of the employment premium, which currently is taken up by about one quarter of households and
which can have perverse impacts on employment incentives of secondary workers. Recent steps to increase
administrative incentives to reactivate the long-term unemployed may also help. The authorities
decentralisation initiative (see Chapter III) transfers financial responsibility for the principal non-work
benefit to the departmental level, which is also responsible for implementation of active labour market
policy. In so doing it is hoped that the locally managed public employment service will become more
effective in its activation efforts. To help in this effort the authorities propose creating a minimum activity
revenue (Revenu minimum d’activité, RMA). To be introduced on an experimental basis at first, the RMA
would allow firms to hire long-term RMI beneficiaries (more than two years) for a period of 6 months
(renewable two or three times) paying them only the difference between the RMI and the SMIC. Such a
step, when implemented, would represent an important step towards increasing the demand for excluded
53
workers and should help combat dependency. The effectiveness of such a policy could be enhanced by
making continued benefit receipt contingent on workers’ acceptation of job offers.
80.
The authorities might also wish to extend the scope of apprenticeship and qualification contract
programmes, which are currently limited to specific sectors, where a well defined training programme can
be elaborated. By relaxing somewhat the requirements for programme certification, young people seeking
to embark in a much wider range of trades could benefit from the unique kind of secondary workers on the
job-training programmes currently limited to those embarking on a career in an area where apprenticeships
have been created. Unlike classical training programmes, which are often provided as a condition of access
to benefits, the success of such on-the-job training schemes derives in large measure from the substantial
element of co-financing embedded into the programmes. Trainees trade reduced earnings for an entry into
the workforce, practical experience and enhanced future employability (and earnings), while employers
provide a real commitment to on-the-job training in exchange for a low-cost proving ground for recruits.
Moreover, such programmes have the advantage of requiring little direct financial input from the public
purse.
Making work pay for older workers
81.
The decline in the employment rates of older-workers reflects the introduction of a number of
reforms that sought, among other things, to reduce labour supply as a way to lower unemployment. Most
visible of these reforms was the 1982 decision to lower the official retirement age from 65 to 60 and
associated reforms to the pension system. These had the effect of simultaneously reducing the number of
years of service necessary to collect a full pension and eliminated the possibility of increasing one’s
pension rights by continuing to work after “full” pension rights were achieved. At the same time, the
UNEDIC extended the range of programmes and the length of time during which older workers could
claim unemployment insurance benefits. As a direct result of these reforms, employment rates of older
workers plummeted. Those of the 60-64 year old cohort dropped gradually from 35 per cent in 1980 to
about 13 per cent in 2001, while those of the 55-59 years old group dropped much more quickly, from
almost 60 per cent in 1980 to less than 51 per cent by 1984 (Figure 15). For men, the decline was even
more precipitous, with employment rates falling by 13 percentage points in four years, with virtually all of
the decline in the participation rates of the 55-59 year old cohort due to early-retirement incentives
(including those of the UNEDIC).22 Since then, the ageing of younger female cohorts has contributed to a
trend rise in the employment rate of 50-59 year old women while those of men have remained stagnant.
Figure 15. Older worker employment rates
55-59 years old
%
%
65
65
60
60
55
55
50
50
45
1970
1975
1980
1985
Source: OECD.
54
1990
1995
2000
45
82.
The ineffectiveness of early retirement programmes as a means of reducing unemployment23 and
the necessity of bringing older cohorts back into productive life has prompted the authorities to reduce the
extent of state-financed early retirement programmes. Over the past twenty years, several initiatives have
sought to limit the extent of early retirement programmes (see Zaidman et al., 2000). The most recent wave
has included steps to eliminate or restrict access to state-financed programmes. In this regard, no new
entrants have been accepted to the employment replacement allowance (Allocation de remplacement pour
l’emploi, ARPE) since 1997 and by the end of 2003 its last beneficiaries will have moved on to the normal
retirement scheme. More generally, the authorities have sought to restrict access to existing early
retirement programmes administratively24 and to promote the use of progressive or part-time early
retirement schemes. As a consequence, the share of the 55-60 year olds enrolled in the various statefinanced early retirement schemes has fallen from 16 to 10 per cent between 1996 and 2002 (Table 7).
Unfortunately, a simultaneous and substantial increase in the number of older individuals receiving
extended unemployment insurance benefits with no job-search requirements meant the effective number of
individuals on early retirement programmes rose throughout the 1990s. As of 2002, some 520 000 older
workers benefited from some sort of pre-retirement scheme, fully one third of those 55-60 years of age.
Table 7. Early-retirement schemes and older-worker employment
1992
1995
2000
2001
2002
Per cent of population 55-60
Early retirement schemes
Conventions ASFNE
ARPE
CATS
Asbestos workers early retirement scheme CAATA
Progressive early retirement
End of work (CFA)
Subtotal
10.9
10.6
0.2
14.4
4.0
5.8
0.3
0.3
2.8
1.2
14.4
2.8
4.3
0.6
0.5
2.5
1.3
12.0
0.9
3.6
11.8
0.0
0.0
0.0
0.0
0.0
0.0
15.1
8.1
23.2
14.1
7.2
21.3
Grand total
11.8
14.4
37.6
33.3
Memorandum items:
Employment rate
Inactive
51.9
35.5
52.5
29.5
53.8
5.8
55.4
8.8
Unemployment insurance based schemes
for older workers
Exempt from job search
Extended benefits
Subtotal
2.3
3.3
0.7
0.5
2.6
1.3
10.7
Source: Anglaret (2002, 2003), OECD.
83.
Both the authorities and the social partners indicate their intention to take additional steps to
reduce the substantial incentives for early retirement currently in place for both firms and employees. The
abolition of the ARPE and tighter conditions governing the ASFNE have already been evoked. The
government hopes to place more emphasis on partial early-retirement programmes in an effort to make
better use of available labour supply. Indeed, this programme already represents a substantial share of all
state-financed early retirement schemes. In addition, the social partners, who govern the UNEDIC decided
in December 2002 to tighten both eligibility and the duration of its unemployment insurance schemes for
older workers. Nevertheless, the financial consequences of an individual losing his job and moving onto
either a state-financed or an unemployment insurance based early retirement programme are limited
55
-- especially as compared with the individual’s expected pension income. Thus, a 56 year old redundant
worker can receive unemployment insurance benefits equal to between 57.4 and 75 per cent of their salary
for as many as 3½ years, without any job-search requirement (see Panel C, Figure 16).25 Moreover, this
period counts as service years for the purposes of calculating his or her pension -- increasing the value of
his or her eventual pension. In these circumstances it would not be surprising, as appears to be the case,
that workers and firms collude in laying off older workers -- either to replace them with less expensive and
perhaps more flexible younger ones (see Anglaret, 2002 and Anglaret and Massin, 2002) or in order to
reduce staffing levels (see Anglaret 2002).
Figure 16. Financial incentives of retirement schemes
Per cent
Replacement rate
Change in pension wealth
A. Regular retirement schemes
100
150
80
100
60
50
40
0
20
-50
0
-100
55
57
59
61
63
65
67
69
age
55
57
59
61
63
65
67
69
age
B. Early retirement schemes
100
150
80
100
60
50
40
0
20
-50
0
-100
55
57
59
61
63
65
67
69
age
55
57
59
61
63
65
67
69
age
C. Unemployment based and other early retirement schemes
100
150
80
100
60
50
40
0
20
-50
0
-100
55
57
59
61
63
65
67
69
age
55
57
59
61
63
65
67
69
age
Source: OECD.
84.
The steps to reduce reliance on early retirement are thus welcome but need to be reinforced
substantially. In particular, while moving to partial pre-retirement will doubtless make the policy change
more politically acceptable, such a step can only be a temporary measure. There is a strong need to move
towards a regime where any form of state-subsidised early retirement is an exception rather than a rule.
Indeed, as the population ages the issue will increasingly be not how to remove incentives to retire
prematurely but how to revise the tax and benefit system so that those individuals who wish to continue
working past the retirement age will no longer find it financially penalising to do so. Currently, pension
rules that claw back an individual’s complementary pension if the combination of their pension income and
their earned-income exceeds their pre-pension after-tax salary effectively makes working beyond
retirement age economically uninteresting.
85.
The authorities have conducted a number of studies evaluating alternative mechanisms to reverse
the decline in older worker employment rates in the context of the ongoing pension reform deliberations
56
(Taddei, 1999, Charpin, 2000, COR, 2002). Among the solutions that have been put forward is the
introduction of a more actuarially neutral treatment of earnings and pensions around the statutory
retirement age (see for example Blanchet and Caussat, 2000 and Sedillot, 2000). Such a reform would
allow those workers that choose to do so to continue working and thereby improving their living standards.
Currently once a worker has contributed 40 years deferring his or her pension has no impact of his or her
pension benefit. At the same time, they would be contributing to national production and, therefore,
government revenues, which would have the additional advantage of easing the overall financial burden
represented by the ageing of the population. There are grounds for considering that a change in these
incentives would result in a considerably altered behaviour. Currently, individuals’ retirement behaviour
clearly reflects such incentives, with clear peaks in the transition to retirement that are associated with
current regulations. The ages at which men cease to be employed has three peaks (58, 60 and 65),
corresponding to the ages at which unemployment benefits can be drawn without having to search for
work, the standard age for retirement (after which additional work ceases to add to pension rights for
people with 40 years work) and the mandatory upper limit on the age of retirement. For women, the peaks
are very different, with a greater proportion of women drawing pensions for the first time at 65, as their
shorter working life implies that they continue to accrue pension benefits while working between 60 and
65 (Direction de la sécurité sociale, 2001).
86.
Adopting a more actuarially neutral determination of pension benefits as a function of the period
in which a person has contributed could also obviate, in large measure, the need for early retirement
programmes. Under such a system, individuals who find their work difficult could choose to retire early,
with a reduced pension of course. Such a solution would have the further advantage of permitting the
elimination the various special regimes, which seek imperfectly to achieve the same goals by offering
special early-retirement packages to certain categories of workers. Not only do these systems raise serious
questions about horizontal equity,26 firms would no longer have a financial incentive to use subsidised
early retirement programmes as a mechanism to rejuvenate their work force (and at the same time reduce
its costs). Indeed, prior to the 1982 reform the pension system offered much stronger incentives to work
past the official retirement age and more flexibility to draw upon one’s contributions before the legal limit.
Moreover, surveys suggest that workers would embrace the kind of flexibility that such a reform would
offer.27 Finally, for those unfortunate older workers who do lose their jobs and whose unemployment
benefits have expired, the actuarially reduced pension could replace or complement extended
unemployment insurance -- offering in many cases more money.
87.
The authorities have proposed revising the “contribution Delalande”, a penalty (equal to between
two and 8 months salary) that firms laying off workers older than 50 years are required to pay to the
UNEDIC. Although firms that hire workers over 50 years of age who have been collecting unemployment
insurance for at least 3 months are not currently required to pay the penalty, it is felt that by increasing
dismissal costs, this special tax may dissuade firms from hiring older workers (45 to 50 years of age). As of
now, firms hiring a worker 45 years of age or older will be exonerated from the contribution. While this
should help, the provision would continue to introduce real distortions. In particular, it tends to artificially
reduce the opportunity of older workers for inter-firm mobility and increases the incentive to lay off those
workers hired with the exoneration.
88.
While such measures would help to eliminate current early-retirement and extended benefit
schemes as a source of unemployment, policy still needs to help older workers that do lose their job. Firms
are reluctant to hire such workers because, given their age, there will be less time to recuperate investments
made in their training. A similar argument holds for the worker, who will be less willing to relocate or
change professions than a younger person. Rather than subsidising these individual's non-employment,
policy should perhaps consider subsidising their employment -- perhaps by affording similar financial
incentives to firms that hire unemployed older workers as those currently provided for hiring younger
57
workers. In addition, in order to help older workers maintain their skills at high levels and thereby reduce
their likelihood of lay off in the first place, training and requalification programmes need to be elaborated
and made available.
Reforms to improve firm-level performance
89.
A wide range of proposals (see Box 4) recently formulated would, if adopted, help promote the
small and medium enterprise sector and, over the longer term, revitalise the economy by promoting the
creation of new enterprises and the purchase of existing ones as their owners retire. In particular, an
economic initiative law in the process of being adopted seeks to increase the rate at which new enterprises
are created and improve the access of small and medium sized firms to the capital and expertise that would
allow them to grow more quickly and improve survival rates for start ups. This initiative follows upon a
range of earlier efforts going in this direction, such as the Loi Allègre which was centred on innovation, the
“États généraux” of enterprises held in 2000, and the 2001 Stability and Growth Pact. In addition to
financing and enterprise creation/transfer initiatives, the new law includes measures to introduce egovernment and reduce administrative complexity facing firms, notably by establishing a single-wicket
service for social security. Particularly significant steps in this regard include the ability to get immediate
provisional approval for the creation of a firm28 through a single internet form, and the reduction in the
minimum capital required to a symbolic euro.29 In parallel, a government-wide programme has been
underway for several years in an effort to simplify administrative formalities. More recently this effort is
being expanded with a view to clear away unnecessary authorisations, with the explicit goal of moving
from a philosophy of that which is not approved is rejected to one coupling a presumption of good faith
with a process of ex post verification.
Box 4. Proposed measures to support the creation, financing and efficiency of small and medium enterprises
Simplification of rules
-
A proposal to reduce the existing 956 forms that firms may have to complete
- In order to progressively streamline processing, authorisations will be restructured so that after a short
period (about 30 days in most cases), requests will be deemed accepted unless explicitly rejected.
1
- To reduce the administrative costs of hiring part-time and temporary workers a special payment
mechanism “chèque emploi associatif” will be put in place in 2004 along the lines of that already in place to
pay for domestic services. This would allow small and medium-sized non-profit associations to write a
cheque to such workers covering only their salary net of social charges, with the associated social charges
then calculated by the social security itself and deducted automatically from the association's bank
account.
- Introduction of a single-counter interface between small enterprises and the wide variety of social
security agencies.
Promoting the creation of new firms and the transfer of ownership of existing ones
- Employees wishing to create a new enterprise will be able to work part-time or take a leave of absence
from their current employer for one year, while retaining the legal right to return to their previous post if the
enterprise does not work out.
- Moreover they will be exonerated from all social charges during this period except those associated
with their condition as an employee.
58
-
More scope will be provided for housing a start-up in one’s principal residence.
- Stay-at-home partners who create a new enterprise will be able to continue to benefit from the social
insurance of their spouses for one year.
- In addition, a new firm may delay payment of social security charges for one year and then pay them
over the following five years. This measure is expected to cost about 200 million euros but it is hoped that
this will be offset over the long term as firms survive and overall employment increases.
- The EDEN programme for individuals receiving social assistance or youth under 30 having left an
emploi-jeune who are starting their own firm or taking control of a troubled firm will be expanded to include
individuals over 50, resulting in a doubling of the number of beneficiaries. Payment will now be made in the
form of an advance repayable over five years.
- In order to facilitate the transition of firms from one owner to another, the taxes associated with the
transfer of the ownership of firms will be reduced and administrative requirements reduced (due to ageing,
some half million entrepreneurs are expected to be seeking to sell their companies over the next ten
years).
- A fixed share of an entrepreneur’s personal capital corresponding to a fraction of the value of his/her
principal residence will be sheltered from seizure if his enterprise fails, unless there is a pre-existing
agreement with creditors.
Improving access to capital
- So-called business angels (a single investor who invests capital into promising small firms and at the
same time provides business expertise and advice) will be granted the same kind of fiscal advantages
currently enjoyed by larger venture capital funds that provide the same kind of services but on a larger
scale.
- Local investment funds (Fonds d’investissement de proximité, FIP) are to be created that must invest
at least 60 per cent of their portfolio within three contiguous regions and at least 10 per cent of the funds
must go to firms less than 8 years of age.
- Individuals investing in FIPs will be afforded an income tax deduction equal to 25 per cent of their
invested capital to a maximum of 12 000 euros (24 000 per couple). Moreover, the capital will be
exonerated from capital gains to a limit of 10 000 euros per individual (20 000 per household).
- An increase will be granted in the income-tax reduction made available to individuals investing in nontraded firms and an increase in the ceiling for deductions in case of related losses.
- The profile of entrepreneurs and entrepreneurship will be raised by promoting school visits to firms and
revising school texts to reflect the critical role that business plays in creating wealth, employment and rising
2
living standards .
- Several measures are in the process of being adopted concerning the wealth tax (impôt de solidarité
sur la fortune, ISF) :
•
A reduction in the tax base for the fraction of individual’s capital represented by a small enterprise
covered by a shareholders pact destined to ensure their ownership share in the firm does not
change.
•
An abatement for minority shareholders that commit to keeping their shares for a long period.
59
•
A relaxation of conditions permitting an exoneration for “professional goods”.
----------------1. The programme will be limited to jobs of short duration, less than 8 hours per week or less than four
successive weeks of full-time work.
2. Pascal Garnier, “Jean-Pierre Raffarin met en oeuvre un plan destiné à créer un million d’entreprises
en cinq ans” Le Monde, October 8, 2002.
90.
These are welcome steps, which need to be vigorously pursued and expanded in order to reduce
the administrative complexity that still plagues businesses and start-ups in France. Thus, the recently
introduced one-stop internet solution for registering a new business needs to be extended to include
registration with the bewildering variety of state and quasi-state agencies that face a new firm. Moreover, a
centralisation of information reporting would help relieve the ongoing burden that dealing with these
agencies places upon firms. In this regard, the recent decision by the authorities to ask that its regulatory
system be reviewed by the OECD (forthcoming in 2004) suggests a willingness to push forward with
reforms and is recognition of the important benefits that a more efficient regulatory environment can yield.
Policies to promote Research and Development and innovation
91.
In addition to these general initiatives, several more targeted steps have been introduced to help
raise productivity growth. In particular, the authorities “Innovation Plan” announced in April 2003 hopes
to raise total Research and Development (R&D) spending from its current level of 2.2 per cent of GDP to
3 per cent by 2010 and in particular increase R&D spending in the private sector, which currently only
spends 2 per cent of GDP on R&D (OECD, 2002). Measures to foster the creation and survival of young
and innovative firms30 include exonerating such enterprises from corporate income tax for their first three
profitable years, an eight year exemption from employers’ social charges for employees working on
research projects, an exoneration from local taxes and a three year exemption on capital gains taxes for
firm’s shareholders followed by a gradual increase as they mature. In addition, the 2003 Budget exonerates
R&D investments from the “taxe professionnelle”. Access to R&D aids will be simplified and the
authorities are considering introducing additional income tax deductions for expenditures on research and
development and re-establishing the favourable amortisation treatment that related investment enjoyed in
the past. In particular, they are considering reforming the way tax credits are extended to cover all R&D
expenditures. One option under consideration is to include the levels of R&D expenditure when calculating
the amount of tax credit. Currently, such credits are authorised only for increases in the level of R&D
expenditures.31 Such a step would increase assistance to firms already investing at high levels and might
favour their maintenance at high levels. By subjecting the credit to a per-firm ceiling, the authorities
indicate that the measure should help contribute to a rebalancing of the level of research as between the
private and public spheres in a revenue neutral manner, while at the same time limiting windfall gains.
92.
The authorities have also put in place a number of initiatives aimed at spurring technological
advances and improving their economic relevance and their diffusion among private firms. Recent
measures include enabling doctoral candidates to pursue their theses in private-sector laboratories, the
creation of on-the-job internships for such students and reinforcing support for innovative firms. In this
regard, there are now 16 research and technology networks (Réseaux de recherche et d’innovation
technologique, RRIT). The networks, introduced in 1998, are tripartite bodies comprised of representatives
from government, industry and the research community. They have been put in place in an effort to
60
facilitate interactions between firms and researchers and are charged with defining promising areas of
research and helping to channel government funding towards economically promising projects. In so
doing, it is hoped that they will increase the economic benefits derived from the substantial sums currently
allocated to supporting public-sector R&D activity. Each network is supervised by one or more ministries,
and, although they are putatively organised on thematic lines, in practice many run on sectoral lines.
Indeed, some pre-existing government-run programmes have been transformed into networks with,
however, the essential difference that now researchers and firms play a more central role in dictating the
direction of spending. Network activities range from those aimed at helping disseminate best practices (e.g.
in the textile sector) to orienting fundamental research towards areas likely to generate longer-term benefits
(e.g. in the Telecom sector). Programmes are co-financed using funds from more traditional pre-existing
schemes.32 The degree of co-financing is generally exceeds 50 per cent, with the details differing as
between networks. State participation in the networks is thought to help prevent cooperative behaviour
from constraining competition, although the oversight role for the competition council (Conseil de la
concurrence) remains important in this regard. The ownership rights and policies of diffusion are supposed
to be determined prior to financing of research. While no systematic evaluation of the networks has been
conducted as yet (many have been put in place very recently), they are generally viewed positively and the
authorities intend to subject the results of each to external review with an eye to reducing support to those
that are less effective and re-allocating that support towards those that are more so.
93.
As concerns dissemination of technological innovations to small enterprises, the authorities have
developed an outreach system involving local chambers of commerce. Here the goal is to make practical
solutions available to local artisans facing problems by funding training programmes that seek to
disseminate best practices, somewhat along the lines of agricultural technical services. The chambers make
the entrepreneurs aware of programmes and how to get money and training to deal with new areas, for
example new techniques for the fabrication of parking lots according to existing norms. For larger firms,
the networks can perform a similar role by facilitating technological dissemination among firms, such as
occurs in the textile RRIT.
94.
Financing of high-tech firms and the transition from an idea to a large and successful enterprise is
an ongoing issue in France, as elsewhere. Programmes in place cover the incubation of ideas and assistance
in the creation of business plans for firms just starting out. There are also programmes destined for those
seeking to expand (facilitating access to risk capital and technical assistance for firms planning IPOs). But
for the moment, the intermediate stages during which a startup evolves into a medium sized firm is, in the
opinion of the authorities, under served. In this regard, it is hoped that the Fonds d’investissement de
proximité (see Box 5) can play a role as well as the already discussed efforts to increase incentives for
business angels, an activity which is currently underdeveloped in France.33
95.
Globally, these measures are steps in the right direction, which should over time help spur an
increase in private research and development activity and a more effective cooperation between the
research and business communities. Nevertheless, problems remain. On the one hand, as yet no formal or
systematic evaluation of programmes is conducted, which makes rational policymaking particularly
difficult. The new tripartite networks may help improve results by implicating business directly in the
process, but, in the absence of stringent evaluations, vested interests will impede the reallocation of
resources towards more viable networks. In particular, it will be important to evaluate the manner in which
projects are supported financially. Current efforts are designed to help firms gain access to credit and this
is why only aid to SMEs is provided mainly in the form of partial loan guarantees (mainly for between 40
and 70 per cent of the loan), which, understandably, increase banks’ willingness to provide loans.
Notwithstanding that guarantees are only honoured if the lending bank has diligently sought to recover the
loan, such guarantees introduce a moral hazard in the banks’ decision making process and could reduce
their incentives to ensure that projects are economically viable, thereby raising the probability that public
funds go to unviable projects. For the authorities, the measures in place to reduce this moral hazard are
61
sufficient. In particular, banks must be shareholders in SOFARIS on the one hand and pay a premium on
the other in order to benefit from the guarantee mechanism, which serves to internalise some of the costs.
Indeed, the authorities note that the National Auditor has made a point of praising the way these loans are
administered. While a programme that relied on subsidised interest rates would not introduce this problem
of moral hazard and could ensure more effective use of public resources, the authorities feel that past
experience with subsidised interest rates was less than fully satisfactory.
96.
Several indicators point to a weakening trend as concerns the international impact of French
research. French researchers' share in world patents fell from 8.8 to 6.3 per cent between 1985 and 2000.
Their citations in academic journals fell by 6 per cent over the same period, reflecting, in part, a catch up
process among other EU countries to reach the high levels already attained by France. Moreover, French
R&D expenditures were the slowest growing among EU countries during the second half of the 1990s.
Some argue that the problem lies in the application of rules and regulations inspired by researcher’s status
as civil servants, which limits the financial incentives to which the best researchers are exposed, and
promotion and resource allocation rules that seem excessively constraining for talented younger
researchers.34 It is even argued that France is paradoxically burdened by too many researchers chasing too
few resources. Here the measures outlined in the loi Allègre, which allow discoverers of new innovations
to share in the revenues generated is a step in the right direction. However, rules that allow their employers
to deduct overhead costs before sharing licensing revenues means that only 10 researchers make a
significant living from their discoveries. To increase incentives a minimum share of the revenues should be
assigned to researchers, before deductions for overhead are taken into account. A related problem concerns
the geographic dispersion of expertise. While recent steps to create centres of excellence have been helpful
more could likely be done to encourage regional specialisation.
Tax policy and the attractiveness of “site France”
97.
Among the results of the OECD Growth Study (2002) is that a high tax burden (or a large
government sector) tends to reduce the rate of growth of potential output. Although seated within a much
more detailed micro-economic analysis of the determinants of growth, these findings confirm earlier
results based on macro economic data.35 While it is unclear whether it is the overall size of government and
a tendency for the state to make less productive use of resources than the private sector, or the distortions
introduced by the high taxes necessary to finance those expenditures, the implications of these results are
clear. While Chapter III deals with questions of public expenditure more generally, this section presents
some recent evidence on those aspects of the French tax system most likely to introduce distortions that
impinge on investment and high-tech activity to the detriment of growth. As concerns foreign direct
investment (FDI), France was the biggest recipient country in 2002 (54.7 billion euros) ahead of China
(52.4 billion euros) and Germany (40.4 billion euros). In 2001, France was third behind the United States
and the United Kingdom. Nevertheless, in net terms, outflows exceeded inflows by 16.7 billion euros in
2002, leaving France in 26th position among 30 OECD countries, a performance nevertheless superior to
that of the United States or United Kingdom.
98.
The Growth Study argues that a large government sector can both reduce the level of potential
output and its rate of growth through several channels. On the one hand, high taxes required to finance
high levels of expenditure may crowd out private investment, inciting locals to invest abroad and
dissuading foreigners from investing domestically. Secondly, taxes themselves tend to introduce
distortions, which can both reduce the level of efficiency of an economy and, perhaps, its rate of growth. A
number of studies suggest that these channels may be at work to some degree in France.
99.
A recent report by the Prime Minister's Economic Analysis Council (Conseil d'Analyse,
Économique, CEA, 2003) argues that for a relatively large country like France, neighbouring countries can
successfully attract investment away by offering lower tax rates and a relatively easy access to the large
62
country's markets. This logic is confirmed by surveys that indicate that while taxation is not a critical factor
in determining plant location decisions, it is a determining one when deciding between otherwise equally
attractive options (OECD, 2002; Ernst & Young, 2002). While France has made a number of efforts to
reduce its corporate income tax rates, steps taken by other countries have been much more important
(Table 8). Moreover, successive changes to the tax system have resulted in the corporate income tax rates
fluctuating considerably over time,36 a negative factor for prospective investors as it introduces uncertainty
into the calculation of future after-tax revenues.
Table 8. Legal corporate income tax rates
1986
1991
1995
1998
2001
Difference
1986/2001
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
United Kingdom
EU average
50.0
45.0
50.0
33.0
45.0
56.0
49.0
50.0
36.0
40.0
42.0
42/47
35.0
52.0
35.0
44.3
30.0
39.0
38.0
23.0
42.0
50/36
46.0
43.0
36.0
33.0
35.0
36.0
35.0
30.0
34.0
36.7
34.0
39.0
34.0
25.0
33.3
45/30
35/40
40.0
36.0
33.0
35.0
36.0
35.0
28.0
33.0
35.1
34.0
39.0
34.0
28.0
41.6
45/25
35/40
32.0
37.0
30.0
35.0
34.0
35.0
28.0
31.0
34.9
34.0
39.0
30.0
29.0
36.4
25.0
35.0
20.0
36.0
30.0
35.0
32.0
35.0
28.0
30.0
32.0
-16.0
-6.0
-20.0
-4.0
-8.6
-31.0
-9.0
-30.0
-0.0
-10.0
-7.0
-15.0
-0.0
-24.0
-5.0
-12.4
United States
Japan
46.0
50.0
34.0
50.0
35.0
47.5
35.0
46.4
35.0
46.4
-11.0
-3.6
Notes: Rates are for the central government only. The EU average is unweighted.
Source: OECD, Bretin Madies (2002).
100.
Of course, the legal rate is only one factor determining the actual taxes paid by firms. But even
when differences in tax bases are taken into consideration, France's relative tax position is not strong (even
though taxation is far from being the only criteria upon which foreign investment decisions are made, it
plays a non-negligible role). Thus, Bénassy-Quere et al. (2003) determined that even when bilateral tax
arrangements are taken into consideration, France is either the 14th or 15th least favoured destination for
investors from 12 of the 15 EU countries (including France), and does no better than the 12th least
attractive. Only in the manufacturing sector and after allowing for tax optimisation, does France come in
with an average rate, and this is a result of a tax system that is strongly beneficial to manufacturing firms.
Indeed, somewhat surprisingly and in contrast to the United States where small companies pay less than
two thirds the tax rate of large ones, in France small and medium enterprises pay effective corporate
income tax rates that are 123 per cent of those paid by large companies37 (Nicodème, 2001). To a certain
extent, the tax measures outlined in Box 4 redress this bias for small and medium enterprises in the hightech area, but more needs to be done to make the tax treatment of small firms more neutral. Here, the
recent reduction of the lower CIT rate faced by small and medium enterprises from 25 to 15 per cent, and
the abolition of the salary portion of the professional tax should help. However, theses steps should be
reinforced, perhaps by a more neutral treatment of amortisation regimes, and a reduction in legal rates.
63
Finally, as emphasised in CEC (2001) it is critical to lower compliance costs for small and medium-sized
enterprises, which impact these firms’ activities disproportionately (especially cross border activities).
Moreover, wealth and estate taxes place a special burden on small and medium enterprises, a problem that
will be increasingly significant in the near future as demographic developments will see a significant
number of these changing hands either through succession or sales.
101.
Labour market regulations are also important in determining firms’ locations, both because a
company's labour force is often among it most important cost but also because rules governing layoffs and
plant closures can raise the costs of an eventual failed venture and therefore the ex ante cost of the
investment. Indeed, France’s industrial structure may well have been influenced by such laws. The
Economic Analysis Council argues, and the results of the Growth Study (OECD, 2003) confirm, that
France's strong employment protection legislation tends to favour large slowly growing manufacturing
firms, who benefit from a stable work force. However, such rules work to the detriment of smaller more
rapidly growing start-ups, whose labour force requirements are much more unstable and which are
therefore more seriously penalised by rigid rules concerning fixed-term contracts and dismissals. Thus, not
only would a reduction of rigidities in this area help labour market performance (see above), it may also
contribute to improving overall productivity growth.
102.
France's personal income tax system has been criticised for its unfavourable treatment of high
earners (see 2001 Economic Survey and Rapport Charzat [2001] inter alia). Two basic problems emerge.
First, despite very high marginal rates France's personal income tax system yields very little revenue
(3.3 per cent of GDP, CSG excluded). Indeed as many as 50 per cent of households pay no personal
income tax. The (Cotisation sociale géneralisée, CSG) on the other hand is applied to largely the same
revenues but with fewer permitted deductions. As a result, most individuals pay the same level of direct
personal taxes as in the US or UK. However, the overall tax burden is very high, largely because of social
charges. Here a particularly heavy burden is generated by the health insurance contribution which is not
subject to a ceiling, resulting in very high overall burdens for high income earners. Thus, the overall tax
burden,38 including both firms and individual social charges, is 79 per cent for someone earning around
75 000 euros a year and rises to 83 per cent for some one earning 450 000 euros which compares
unfavourably with rates of 61 and 53 per cent in Germany and 48 and 43 per cent in the United Kingdom
(CEA, 2003). For knowledge workers that might be exposed to these rates of taxation or the firms that
would employ them, the financial disincentives to locating in France are substantial. In this regard, the
authority's decision to lower personal income tax rates last year will help, but much more needs to be done.
A first step would be to place a ceiling on the health insurance contribution, which for high income earners
clearly bears much closer resemblance to a tax than an insurance premium. Current rules exonerating
foreigners from social security contributions for a period of 5 years (as long as they are otherwise covered)
is a positive move, but does not deal with the long-term costs imposed by the system.
Regulations in the retail trade sector
103.
France is a country characterised by extensive product-market and labour-market regulation. The
OECD Growth Study has highlighted the impact that excessively rigid rules in these areas can have on
productivity and economic growth. In recent years, France has taken a number of steps to reduce the
administrative burden faced by firms and to reduce rigidities in labour markets (see above). Nevertheless,
administrative complexity continues to be perceived as a problem.39
104.
In this regard, the rules governing the implementation of large-scale commercial outlets, and
those which specify the limits within which firms are free to set prices, appear to have had perverse effects.
Indeed, the 1996 loi Raffarin, itself an amendment to the 1973 loi Royer was initially designed to prevent
large-scale "hyper markets" from driving out smaller firms. However, it has dramatically reduced entry
into the retail sector and paradoxically increased considerably the market share of the largest firms. Hyper-
64
markets were unable to expand by building new stores to the extent they desired and instead have
expanded by growing internationally on the one hand and via mergers and acquisitions on the other. By
2001, the 5 largest firms controlled 80 per cent of the French market, as compared with 60 per cent in and
the United Kingdom, Germany and Spain; and 30 per cent in Italy. Perhaps reflecting the administrative
difficulties in getting approval to build or occupy even a medium-sized commercial space, discount
retailers hold less than 12 per cent of the French market as compared with more than 32 per cent in
Germany, although they are gaining market share.
105.
This increased concentration of the retail sector and weak low-cost competition appear to have
combined with rules prohibiting loss-leader sales to result in a much higher rate of inflation for namebrand goods (Table 9). In practice, the Loi Galland prevents retailers from selling below invoice price, but
authorises suppliers to pay retailers what are called "back margins" (marges arrières) in exchange for
favourable placement on store shelves, or special promotional services that stores might provide. Given the
importance of the market share of large retailers, they are able to charge substantial fees in this form. In
effect, the large retailers may be getting a discount on the prices they pay suppliers, but the benefit is not
passed on to consumers in the form of reduced prices. As a result, and recognising that causality is very
difficult to determine, it would appear that wholesale distributors and producers of name-brand products
chose to raise their prices so as to offset the increased back margins and maximise their own profits. In
these circumstances it would appear that a relaxation of rules governing large and medium-sized stores is
needed in order to increase competitive pressures within the sector and so as to allow firms to pass on
economies of scale in the form of lower prices. International data suggests that France has already reached
a point where the development of hyper markets has peaked and at which more traditional supermarkets
can be competitive.
Table10. Inflation of name brand versus in-house products
Inflation rate in February 2002
In-house brand
market share
Pet food
Fruits conserves
Prepared foods
Beauty products
20.8
32.4
22.4
4.4
Name brand
5.3
8.9
8.8
8
In-house brands
2.1
2.1
6.2
0.9
Difference
3.2
6.8
2.6
7.1
Source: Etude Iri Business Conseil.
Corporate governance and regulation
106.
The end of the internet bubble revealed a number of excesses, both in legal terms and in the
governance of firms. The opaque accounting practices of Enron in the United States and Ahold in Europe
are emblematic of some of the abuses, while the large losses accumulated by France Telecom and Vivendi
Universal, which together lost more than 2 per cent of French GDP in 2002, have been raised as examples
of problems in corporate governance of both state- and privately-owned companies. Globally, the French
authorities are of the view that there were fewer excesses in France than elsewhere and that the French
regulatory framework has worked relatively well. Nevertheless, they took steps in 2002 to reinforce
financial market supervision by creating a new and powerful integrated regulator of financial markets.
107.
Following extensive consultation with relevant parties, cabinet drafted a new legislation bill on
financial security that was presented to parliament in February 2002. The bill is intended to respond to the
65
crisis of confidence that recent high profile losses and apparent examples of conflict of interest have
generated in both the United States and Europe. It is a three pronged reform, including a thorough overhaul
of the supervisory authorities responsible for financial activities; the creation of new mechanisms to
reinforce the protection of small investors and the insured; and the modernisation of supervisory
mechanisms for corporate accounting and governance. Measures proposed, include:
•
The unification of the financial market council, the securities commission (Commission des
opérations de bourse) and the financial management disciplinary council (Conseil de discipline
de la gestion financière) into a single body, the financial markets authority (Autorité des marchés
financiers)
•
The merger of the authority responsible for supervising insurance companies with that
responsible for supervising the activities of mutual insurance companies
•
Authorisation procedures facing insurance companies and credit institutions will be harmonised
•
The clarification of rules governing direct solicitation for securities and redefinition of the
minimum professional requirements for financial investment consultants
•
The creation of a guarantee fund to ensure against the default of non-life insurance companies
•
The reinforcement of the role of the general shareholders meeting. In particular, it requires the
shareholder meeting to oversee more closely the decisions made by company executives
•
The enhancement of disclosure and transparency requirements
•
The prohibition of auditors from acting as both auditor and consultant to a single client and the
requirement that companies change auditors on a regular basis
•
The creation of a supervisor, working under the authority of the Ministry of Justice, charged with
overseeing the audit profession and safeguarding auditors’ independence.
108.
In addition, the authorities have pursued liberalisation efforts in the network industries. Here the
most important steps were the decision to transpose EU regulations on competition in the electricity sector
into French law, and the decision to transform the historic monopolist (Électricité de France et Gaz de
France, EDF/GDF) into joint stock companies, with an eye to their eventual privatisation. As discussed in
the previous Economic Survey (OECD, 2001), the transposition of the EU directives will likely have only a
limited impact on prices in France or on ex post market shares because retail electricity prices are already
relatively low in France and administrative steps have already been taken to allow foreign firms access to
commercial contracts. Moreover, the management of the electricity grid remains in EDF’s hands, and
although the Energy Regulatory Commission is charged with ensuring the transparency of the grid's
operation, the management links between EDF and the grid remain a source of potential conflict of
interest. A cleaner separation of the two entities would help eliminate any doubt in this regard. The
transformation of EDF and GDF into joint stock companies will mean they no longer enjoy the special
status of EPIC (Public enterprise of a industrial and commerical nature). As a result, they will no longer
benefit from an implicit State guarantee and, therefore, the lower interest rates that provoked an EU
investigation to determine whether or not this constituted an unfair state aid. Finally, with an eye to the
eventual privatisation of the two firms, steps will need to be taken to deal with their substantial pension
liabilities, either by significantly increasing company debt or by transferring the liability to the State.
66
Progress in reducing the role of the state in the business sector
109.
France has a long history of State involvement in the economy, with the latest wave of
nationalisations having occurred some 20 years ago in the early 1980s. Since then, a long process of
privatisation has been pursued at varying levels of intensity, with the result that public sector no longer has
a significant position in the banking and insurance sectors, nor among the most important industrial
sectors. Nevertheless there remains a close (although weakening) linkage in popular perception between
the notion of public service and public ownership, which is frequently reflected in strong and vocal
opposition to privatisation initiatives. These attitudes reflect widespread satisfaction with the level and
quality of services that have been provided by state-owned firms and collective pride in the highly visible
and successful technological products and industrial enterprises that were developed under state ownership.
On the other hand, they may also reflect largely past practices, whereby the full cost of providing these
services was not passed on in the prices charged to end users.40
Box 5. The State as entrepreneur
Since 1982, the authorities have privatised (reduced its ownership position below 50 per cent) some
2 000 firms. As a result, employment in majority state-owned enterprises has declined by 1.35 million and
such firms no longer play a significant role in a number of sectors where they were once dominant or major
players (notably banking, insurance and manufacturing).
Nevertheless, the state remains an important actor in the French economy. In 2000, it still owned some
1 500 enterprises, employing over a million individuals representing 8 per cent of total employment in the
non-financial sector, 12 per cent of value added and 30 per cent of assets.
1
Only 97 companies are directly held by the State, with the remainder controlled indirectly -- either as
daughter firms or wholly-owned subsidiaries. Of these, six companies (Air France, France Telecom,
La Poste, EDF/GDF, RATP and SNCF) represent the bulk of the economic weight represented by these
state-owned firms. Of these, two have already been partially privatised (Air France and France Telecom),
while initial steps that would permit the introduction of private capital into EDF and GDF are currently
underway.
In addition to the 1 500 state-owned enterprises, the State also has a minority stake in some 40 firms.
--------------1. These firms represent almost 90 per cent of employment in state-owned enterprises. Of the 97, 45
have no subsidiaries, while 21 are holding companies with 12 or more subsidiaries, which may or may not
also have subsidiaries. The Caisse des dépôts et développement and the SNCF each have over 300,
while the Commissariat à l’énergie atomique (Atomic Energy Commission), EDF/GDF, and have between
100 and 200 each.
110.
Notwithstanding the contentiousness of the issue, successive French government have
substantially reduced the role of the state in the business sector (see Box 5). In some areas (notably
telecoms), the elimination of former state-owned monopolies and their (partial) privatisation has resulted in
a phenomenal expansion of services and decline in prices, helping to make clearer the benefits of a more
competitive environment (Economic Survey, 2001). In the recent past, the authorities have continued the
trend to reduce the role of the state in the economy. Sell-offs of state-owned business assets yielded 2.1
and 6.1 billion euros in each of 2001 and 2002. Major transactions have included, the sale of the State’s
remaining 10 per cent holding in Credit Lyonnais (2.2 billion euros), a further sale of Renault shares, the
sale of Thomson Multimedia and the opening to private investors of the capital of Autoroutes du Sud.
Looking forward the authorities hope to sell a further 8 billion euros of assets in 2003, bringing the total
67
over the 3 years to about 1 per cent of GDP – although attaining this goal will depend on market
conditions. Additional sales under consideration include the State's remaining minority stakes in Renault
and Thomson Multimedia and further reductions in its holdings in Air France, SNECMA (an aeronautical
manufacturing firm) and possibly France Telecom. In addition, plans are well advanced to convert EDF
and GDF from Établissements publics à caractère industriel et commercial (EPICs) to joint-stock
companies as a first step towards an opening of their capital to private investors and a possible future
privatisation.
111.
These are positive steps, which when completed should help these enterprises take full advantage
of market opportunities and effectively harness private capital to finance their international operations and
acquisitions. In the past, their status as State-owned companies has constrained their activities. In the case
of France Telecom, existing legislation requires the state to retain a majority stake. The authorities’
unwillingness to change the legislation and, perhaps, the reluctance of target firms to accept France
Télécom shares -- given its state ownership -- forced it to finance much of its investment and expansion
activities by taking on debt, in contrast to many of its competitors. As a result, towards the end of 2002 and
following the end of the Telecom bubble, France Telecom was among the most indebted companies in the
world (68 billion euros or about 5 per cent of GDP) and doubts emerged as to the firm’s liquidity, resulting
in a downgrading of its debt. Following a change in management, a restructuring plan was announced
(15 billion euros in debt restructuring, 15 billion in the form of a recapitalisation: and 15 billion in the form
of increased internal earnings). The same day, the State indicated its support of the plan and its willingness
to open a line of credit worth 9 billion euros, if necessary, in advance of its own participation in the capital
increase. It also indicated its willingness, if necessary, to modify the law requiring it to retain a majority
stake. The line of credit was never put into place, as the simple announcement of the government’s
willingness to extend it appears to have been enough to reduce the risk premium associated with France
Télécom bonds and thereby facilitated the restructuring of its debt on financial markets. In March 2003, the
company proceeded with its recapitalisation effort, with the State taking up its share through a special
purpose EPIC, the ERAP. These steps and others aimed at strengthening its balance sheet have helped
reduced the company’s net debt to 53 billion euros. The steps taken by the State in favour of France
Télécom have been contested as unfair State-aid by several of France Telecom’s competitors and is
currently under investigation by regulators in Brussels.
112.
As concerns, EDF, the European Commission has determined that its special status as an EPIC,
which entitled it to preferential interest rates because of an implicit state guarantee, gave it an unfair
advantage (an enquiry is currently underway to determine whether the extent of this aid exceeds the value
of the public service tasks performed by the company). Moreover, the issue of the contingent liability
represented by EDF’s pension scheme has yet to be resolved. Transferring this liability from the firm either
to the government or to the Réseau de transport d’Electricité as has been proposed by some41 would
represent a significant and possibly uncompetitive aid to the historic monopolist.
113.
The authorities’ decision to transform EDF and GDF into joint-stock companies resolves the
issue of preferential interest rates but does not address the asymmetry that their state ownership poses as
concerns their foreign acquisitions. The same problem concerns Air France and France Télécom. While
these organisations have taken advantage of the wave of liberalisation by entering into foreign markets
either by purchasing shares or outright ownership positions in former state monopolies, foreign enterprises
have been denied a reciprocal right as long as the French government refused to sell its majority stake, a
factor which in the case of EDF and GDF has led foreign governments to place restrictions on the ability of
these companies to exercise a management role in firms they have taken stakes in. Indeed, one of the
motivations underlying the authorities' decision to reduce the State’s stake in Air France from its current
54 per cent to somewhat less than 20 per cent is the recognition that other European airlines would be
unwilling to go beyond simple and already existing commercial alliances with Air France as long as the
State retains its majority stake.42
68
114.
The money earned from these sales should be used to reduce the debt or to build up the various
contingency funds that have been created to help ease the financial burden in the various French pension
schemes as the population ages (see Chapter III). However, virtually all (97 per cent) of the 30 billion
euros (2 per cent of GDP) in privatisation receipts collected since 1996 have been used instead to support
other state-owned companies by reducing their debt or increasing their capital. Over the most recent period
(2001-2), the bulk (40 per cent) of privatisation revenues have been provided to the French railroad
infrastructure company (Réseau ferré de France, RFF), with other important beneficiaries including: EPFR
(a public corporation set up to carry the debt contracted by the restructuring of some of the assets of Crédit
Lyonnais in 1995), GIAT (an armament company) and the Direction des constructions navales (a
shipbuilder).43
115.
Questions about the capacity of the state to provide effective governance over state-owned
enterprises arose in the context of the large debts accumulated by France Telecom over the past several
years and some of the less successful foreign investments of EDF. Critics argue that on the one hand, for a
number of acquisitions, companies failed to get approval from their supervisory boards, notably the
representatives of the Ministry of Finance charged with overseeing the state’s holdings, which resulted in
substantial losses (most notably the German MobilCom). On the other hand, they question the confused
governance of partially privatised or state-owned firms that are supposed to be managed according to
commercial principles but which are, nevertheless, required by the State (acting not as a shareholder but as
a guardian of public policy) to provide unprofitable public services or undertake operations that are not in
the interest of the firm itself.44 Indeed, a recent report commissioned by the Minister of Finance concludes
that "the State does not exercise its stockholder role effectively" and criticised the inherent conflicts in its
efforts to simultaneously act as stockholder, strategist, regulator and client of such firms. It was
particularly critical of the effectiveness with which the State effected its role as owner, arguing that it gave
unclear guidance to managers, that State-owned firms had poorly functioning Boards of directors and that
the State played an excessive role in the day to day operations of the enterprise (Barbier de La Serre et al.,
2003).
116.
The report also recommended that State-owned companies should be managed according to
commercial principles, that those still operating as Public Companies (EPICs) should be transformed into
joint-stock companies and that the financial costs of public services should be made clear, via explicit
contracts for the provision of such services. Moreover, it argued that the number of directors on their
Boards should be reduced to about 12 (exceptionally 18) and that, where the State was a majority owner, at
most 6 of these should be State employees. In addition, it argued that the commercial experience and
expertise should play a larger role in determining who represents the State on company boards. All of these
are sensible recommendations that would go along way to preventing the kind of very expensive excesses
of the past. Indeed, the authorities have taken up one recommendation by announcing the creation of a
State Ownership Agency (Agence des participations de l'état, APE), which will be charged with watching
over the State’s holdings and exercising its rights as a shareholder in all State-owned companies, except the
Caisse des dépôts et consignations (a state-owned financial intermediary).
117.
The creation of the APE is a clear step in the right direction and government assurances that
companies are to be operated on commercial principles is welcome. However, it is not yet clear to what
extent the Agency will, in fact, have the authority to pursue its mandate. The APE will employ both
private-sector employees and civil servants, with the former paid according to private-sector wage scales.
However, the agency will be administratively attached to the Treasury and operationally attached to the
Ministry of Finance to which it will be ultimately responsible. Moreover, ownerships of companies will
stay with individual Ministries -- leaving open the possibility that they be instructed to act according to
non-commercial principles. In order to ensure that the full potential of this agency to rationalise the
governance of state-owned firms is realised, additional efforts should be made to implement many of the
other recommendations of the Barbier de la Serre report. In particular, the suggestion that the public
69
service obligations of state-owned enterprises be made explicit and contractualised would not only increase
transparency but could be a first step towards providing such services on a competitive basis. Indeed, the
authorities will soon present a bill transposing the European directive on Telecom packets into French law
and this, if passed, will allow the contracting out (after a call for tender) of the public service component of
Telecom services. This could be an important first step, to the extent that the tender is designed in such a
way as competitors are in a position to compete. Indeed, the dominance of France Telecom and other Stateowned firms in some sectors underlines the necessity of strengthening regulatory functions especially if
these companies are to increasingly act on a purely commercial basis.
118.
As concerns the remaining 1 500 state-owned enterprises and the forty-odd firms where the state
retains a minority position, the authorities should take steps to reduce their holdings of these companies.
To the extent that the state’s ownership position in these firms is not strategic, there seems to be little
economic or political justification for retaining them. Indeed, for these firms governance issues may be
even more serious as the sheer number of them makes effective monitoring of their activity difficult.
Moreover, for healthy and productive firms, statutory and budgetary constraints limit the authorities’
capacity to invest in them, possibly preventing then from realising their true economic potential. In order to
resolve these issues, the authorities should consider accelerating the disinvestment programme by
confiding their sale to investment bankers specialised in such transactions.45
Some aspects of sustainable development
119.
There is growing concern that long-run sustainable development may be compromised unless
measures are taken to achieve balance between economic, environmental, and social outcomes both
domestically and on a global basis. This section looks at two specific issues of sustainable development
that are of particular importance for France. In each case, indicators are presented to measure progress and
the evolution of potential problems, and an assessment is made of government policies in that area. The
section considers French policies in the realms of mitigating climate change and reducing water pollution
and follows up a more comprehensive treatment of environmental issues in the 2001 Economic Survey.
Various aspects of the sustainability of pension and healthcare expenditures are treated in Chapters I
and III. The section also considers whether institutional arrangements are in place to integrate policymaking across the different dimensions of sustainable development (see Box 6).
Climate change46
120.
France is participating in international efforts to limit greenhouse gas (GHG) emissions in line
with the Kyoto Protocol. Under the EU burden sharing agreement, France is committed to containing its
emissions in 2008-2012 at their 1990 levels (in contrast to the 8 per cent fall for the EU as a whole). Given
the low carbon intensity of the economy, suggesting possibly high marginal abatement costs, it may be
particularly difficult but also especially important to achieve compliance with Kyoto-related requirements
in a cost-effective manner.
70
Box 6. Policy integration across sustainable development areas
1
Economic and social objectives have been integrated in policy assessment for many years. There is a
wealth of reports analysing problems and making proposals for remedies but these are not always
translated into actual policy reform. In addition to this general policy analysis, every legislative proposal
must include studies of its impacts on the economy and on employment. However, the assessment of
economic impact is often limited to an estimate of budgetary costs.
In the last decade, efforts have been made to improve the extent to which environmental factors are taken
into account in designing major investment projects. Environmental Impact Assessments were made
compulsory in the 1992 Water Management Act and their scope widened in the 1996 Air Pollution
Prevention Act. For example, a complete cost-benefit analysis, including externalities, is now made for
every road project as well as a report on non-quantifiable environmental effects. For many externalities, a
standard set of monetary values has been established in order to provide a straightforward method of
integrating many environmental concerns into the decision taking process on a uniform basis. As from
2004, analysis of environmental impacts will be widened to cover plans and programmes as well as
projects. However, in line with the 2001 EU directive on “Strategic Environmental Assessments”, such
policy assessment does not encompass economic and social outcomes, nor does it require the use of
cost-benefit analysis. The institutional capability of the Ministry of the Environment to undertake such
analyses has been strengthened and this could lead to more weight being given to economic factors in
these analyses. A widening of the scope of the SEA's could draw on the long experience of ex-post
evaluation of public policies first at the General Planning Commission (CGP) and, since 1999, at the
independent National Council for Evaluation. In 2001, this institution completed a thorough examination of
water policy and is currently reviewing waste management.
France has embarked on a comprehensive consultative process to decide how to add environmental
objectives to its constitution. Though the precise form of proposals have not been decided, the main
objective is to give more weight to environmental objectives in order to bring them into line with the
treatment of economic and social goals in the constitution. Such treatment could also provide a renewed
opportunity to generalise use of the polluter-pays principle and cost-benefit analysis.
____________________
1.
The sections in this report dealing with mitigating climate change, reducing water pollution, and ensuring
sustainable retirement income are inputs into the Organisation’s follow-up on sustainable development, as mandated
by the Ministerial Council decision in May 2001.
121.
Low GHG emissions per unit of GDP are largely due to the predominance of hydro and nuclear
power (Table 10). These sources accounted for 87 per cent of electricity generation in 1990 rising to 91 per
cent in 2000,47 thereby contributing to a notable reduction in the emissions intensity of the electricity sector
during the 1990s (Table 11). Emission intensities also fell in other sectors, with large cuts in emissions of
nitrous oxides from chemical industries. On the other hand, emission intensity in transport was constant but
increasing volumes meant that overall emissions in this sector rose faster than economic growth
(Table 10). All in all, emissions in 2000 were 1.7 per cent below their 1990 level (MIES, 2002). Despite
this good performance in the past and assuming policy remains unchanged, GHG emissions in 2010 are
forecast to be 6 per cent above the stabilisation target (MIES, 2001), mainly because only a further limited
increases in the share of nuclear energy are possible and transportation growth is likely to remain high.
122.
This expected overrun of emissions led the French authorities to introduce a climate change
strategy in January 2000 that assuming economic growth does not exceed 2.2 per cent annually in the
decade to 2010 aims at achieving the EU burden-sharing target without the purchase of any carbon credits
from abroad.48 The plan would put in place a dual system of ceilings on the costs of avoiding carbon
emissions, amounting to 76 euros per tonne for instruments and double that where regulations are being
considered. Both these limits are significantly higher than some estimates of the likely price of permits in a
future open EU market of 20 euros per tonne of carbon (IEA [2002] and Criqui et al., [2002]). Despite the
economic efficiency of carbon taxation as an instrument to reduce emissions in the industrial sector, the
71
decision to implement such a scheme has now been shelved (see OECD, 2001). It had been estimated that
this tax would have achieved about one-third of the required reduction in emissions relative to a baseline
without policy actions.
Table 10. Main indicators: climate change
Indicators of greenhouse gas (GHG) emission intensity, grams of CO2 equivalent per $PPP of GDP, in 1995 prices
Total
GHG
emissions
CO2
emissions,
electricity
CO2
emissions,
transport
Other
GHG
emissions
Level, 1999
Australia
Austria
Belgium
Canada
Czech Republic
Total
GHG
emissions
CO2
emissions,
electricity
CO2
emissions,
transport
Other
GHG
emissions
Average annual percentage change 1990-1999
1053
419
617
893
1058
370
72
97
151
457
155
91
101
193
88
528
256
419
549
513
-2.07
-1.87
-1.36
-0.98
-3.05
-0.21
-2.75
-2.12
-0.12
2.55
-1.93
-0.52
0.16
-0.36
5.53
-3.24
-2.06
-1.52
-1.41
-6.93
Denmark
Finland
France
Germany
Greece
549
652
416
536
813
194
181
32
169
275
94
105
103
96
130
261
366
280
271
408
-1.64
-1.88
-1.69
-4.00
-0.24
-1.43
-0.02
-2.04
-3.86
0.07
-1.49
-1.29
0.16
-0.57
0.74
-1.85
-2.83
-2.26
-5.05
-0.73
Hungary
Iceland
Ireland
Italy
Japan
786
395
694
439
432
250
4
165
105
130
84
88
103
92
82
453
303
426
242
221
-2.33
-1.28
-4.27
-1.05
-0.30
1.44
0.00
-2.41
-0.82
-0.03
0.38
-2.31
0.79
0.37
1.24
-3.74
0.81
-5.75
-1.64
-0.99
Luxembourg
Netherlands
New Zealand
Norway
344
573
1096
487
6
138
92
4
242
82
175
113
97
352
828
369
-11.46
-2.38
-2.28
-2.54
-30.20
-1.03
4.58
1.31
-0.45
-0.94
0.65
-1.53
-18.81
-3.15
-3.32
-2.87
Poland
Portugal
Slovakia
Spain
1195
540
957
537
481
149
200
127
90
106
76
130
624
285
680
280
-4.96
0.41
-4.47
0.41
-6.63
2.58
-1.21
1.12
0.50
3.37
3.13
1.28
-4.12
-1.39
-5.78
-0.26
Sweden
Switzerland
United Kingdom
United States
358
276
526
792
41
3
132
278
112
79
108
196
204
195
287
318
-1.55
-0.62
-3.66
-1.89
0.07
-1.96
-5.30
-0.60
-0.65
-0.28
-1.38
-1.18
-2.30
-0.73
-3.61
-3.28
OECD total
EU
649
506
196
120
140
103
312
283
-1.80
-2.36
-0.98
-2.60
-0.38
-0.16
-2.83
-2.95
Source:
Greenhouse gas emissions: national submissions to the UNFCCC and national publications. Carbon dioxide emissions
for electricity and transport: IEA (2001). GDP: OECD, SNA database.
123.
Since then, firms have pledged to contain their emissions in the periods 2003-2004 and
2005-2007 under the supervision of an association controlled by the participants in the scheme. Each
member would set its own target but would need approval from the supervisory body that would then
monitor compliance and possibly claim fees from companies exceeding their targets. Following the
rejection on constitutional grounds of the initially proposed tax measure, the government now supports the
voluntary scheme, acting as a simple observer within the supervisory association. The employers’
association envisages that emission allowances would be traded amongst participating companies, although
it is not clear that a trading scheme can be built efficiently using voluntary rather than mandatory limits
(Lenain and Vourc’h, 2002). As yet, neither the coverage of the scheme, nor the extent of emission
reductions, nor the possible role of legislation in the scheme has been settled. While the effectiveness of
such a scheme is uncertain, experience gained using the infrastructure for the voluntary scheme may help
in the implementation of the EU system.
72
-2.4
-2.2
-2.0
-3.1
-2.0
-1.1
-1.6
-4.1
-2.5
-0.7
-2.3
15.6
1.9
-0.4
1.9
-1.2
-4.1
-3.4
-7.8
10.0
-8.5
-5.6
0.4
-2.3
-5.5
-7.7
-1.2
-5.0
8.0
-2.0
-4.6
-1.3
-3.4
-11.4
-0.6
-0.6
0.1
0.4
-0.7
-0.2
1.1
-1.7
-0.4
0.6
-0.2
1.0
-0.2
-0.6
0.9
-2.0
-1.6
3.5
0.4
0.1
0.5
-0.6
0.1
-2.6
-1.1
-1.7
-1.8
0.0
1.4
-1.4
1990-1998
Road transport CO2
emissions per
vehicle
73
Source: GHG National submissions to UNFCCC, national sources and UNFCCC; carbon dioxide data, IEA; industrial production, private consumption, OECD.
1991-1998 for Czech Republic; 1995-1999 for Slovakia.
-0.4
-1.8
-0.7
-4.0
0.1
-1.7
-5.3
-6.3
1.2
-6.3
-1.5
-13.8
-2.4
0.3
-2.0
-13.5
..
-11.2
-1.8
0.7
-3.6
-5.4
-1.5
-2.7
-1.6
-0.5
-3.1
-1.0
-3.1
-12.6
2.
4048
EU countries
0.0
0.5
1.0
-3.8
-4.7
0.2
-3.7
0.6
-2.0
0.1
-21.5
-0.3
5.6
4.8
-1.2
..
-0.6
-1.6
-1.1
-3.7
-1.0
-2.8
-2.2
-1.7
0.4
-2.5
-2.0
0.4
1.9
Residential CO2
emissions per unit of
private consumption
Annual average percentage change
1995-1999 for Czech Republic; 1991-1999 for Germany; 1992-1999 for Hungary and Slovakia; no data for Iceland.
7428
0.0
0.0
-1.5
1.2
-1.5
3.1
-3.6
2.9
-6.4
0.4
0.5
0.9
-2.0
1.1
2.2
0.4
1.0
0.6
-0.1
-0.1
-2.3
1.9
1.6
0.3
0.6
1.6
-3.4
1, 2
1990-1999
CO2 emissions per
Kwh electricity
1.
14257
OECD excluding US
71
53
647
6830
Total of above OECD
countries
Sweden
Switzerland
United Kingdom
United States
400
86
53
371
Poland
Portugal
Slovakia
Spain
84
3
65
540
1328
Hungary
Iceland
Ireland
Italy
Japan
6
218
76
56
73
76
549
994
124
Denmark
Finland
France
Germany
Greece
Luxembourg
Netherlands
New Zealand
Norway
489
80
151
699
138
Australia
Austria
Belgium
Canada
Czech Republic
Level million tonnes
CO2 equivalent
1999
Total GHG emissions
Manufacturing
CO2 emissions
per unit of
industrial
production
Table 11. Greenhouse gas emissions and sectoral indicators
-0.2
0.0
-0.3
-0.9
1.9
-0.7
-0.8
-3.0
2.0
0.9
1.0
-11.1
-0.7
-0.9
-3.4
2.7
2.9
-1.8
0.8
1.1
2.4
1.0
0.8
-1.7
1.8
-0.6
-0.2
-0.1
-0.6
0.6
-0.5
-0.6
0.1
1.5
1.0
-1.6
1.2
3.8
-1.2
-2.4
-0.4
-3.3
-0.8
-1.0
-1.5
6.2
..
5.6
-0.4
-1.9
0.8
2.9
-0.2
-0.9
-1.4
-1.9
1.1
-0.3
1.0
1.7
Industrial output
per unit of GDP
1990-1999
Electricity use per
unit of GDP
124.
In the transport sector, taxes have been lowered, rather than increased as suggested in the
strategy, and policy is now relying on the markedly inferior instrument of capacity constraints to divert
traffic to public transport. The goal of the strategy was to hold emissions from transport at their 2001 level
for the next twenty years, in contrast to the 18 per cent increase in the previous decade. The plan
acknowledged that such a target would require the doubling of motor fuel taxes and proposed more modest
increases. In practice, taxes have not been raised; rather in the case of commercial diesel fuel, they have
been lowered. As a consequence, the favoured domestic instrument to achieve the goal has become the
reduction of expenditure on roads and an increase in the supply of public transport.
125.
Some help in reducing emissions may come from the European voluntary agreement to reduce
the average fuel consumption of new vehicles by 25 per cent in the period from 1998 to 2008. This goal
could be achieved at an estimated cost to consumers of 500 euros per tonne of carbon abated over the
lifetime of a vehicle. In France, vehicle owners would gain from the higher vehicle costs associated with
such an agreement as the implicit carbon tax paid on fuels, that will be saved through higher fuelefficiency, is more than 500 euros and 900 euros per tonne on diesel and gasoline, respectively. Seen as an
instrument to reduce emissions, the agreement will lead to over-investment in fuel-saving technology.
Indeed, there are other means of attaining France’s greenhouse gas objectives, notably by purchasing
carbon rights on the international market or via emission reductions in other sectors, such as industry. To
rationalise efforts in the transport sector, would require that the tax on gasoline be separated into different
instruments dealing with the small remaining air pollution externalities, infrastructure costs and finally the
externalities due to carbon emissions. One way to achieve this would be to move to a greater use of
charges based on distance travelled (ECMT, 2003). Such charges could incorporate the pollution
externalities and user cost charges, while the gasoline and diesel tax would reflect the carbon externalities.
126.
In the electricity sector, the strategy aims at promoting conservation and increasing considerably
the share of renewable energy. The strategy, which is also motivated by other energy policy concerns,
such as the security of supply, is relatively expensive given the carbon emissions reductions expected.
Currently, 17 per cent of electricity is generated from renewable sources, primarily hydroelectricity. This
proportion is slated to rise to 21 per cent by 2010 with three-quarters of the increase coming from an
expansion of wind power. This form of generation capacity is not suited to reducing carbon emissions from
the French electricity system as most of these come from fossil-fuel plants that are used in short periods of
high demand. If instead, the objective is to replace base-load demand, then it does not appear competitive
(Table 12). In addition, in 2001, the instrument used to foster the expansion was changed from competitive
bidding for subsidies to the obligation for the public electricity company to purchase all renewable output
at a price fixed for the next fifteen years. According to the energy regulator, these tariffs are resulting in
returns on investment of up to 20 per cent, well over the cost of capital of these firms (CRE, 2002). The net
result of these policies is that, for some 700 megawatts of installed capacity, the additional wind-based
electricity will add 0.9 billion euros annually to electricity costs (CGP, 2002) at a cost of 900 euros per
tonne of carbon emissions avoided, about 45 times greater than some estimates of the likely price of
emissions in the international market.
127.
A further challenge will be to find a market structure that ensures the financial stability of the
nuclear industry when the electricity sector is liberalised. One major uncertainty that faces the industry is
managing the cost of both end-of-cycle nuclear fuel and decommissioning nuclear power stations. For the
former, a decision is needed for a site for long-term storage of waste. As to the latter, no second-generation
plants have come to the end of their life and, as a result, actual costs have not been observed. For the
existing inventory of plants, these costs are estimated to be equal to 15 per cent of total construction costs
an estimate that concords with international concensus for such reactors and that has been confirmed by
detailed studies undertaken by EDF. On this basis, the company makes provisions each year to cover the
future cost of dismantling its reactors. However, until recently these provisions have been reinvested in the
company, with the result that no separate fund has been accumulated to cover decommissioning costs.49
74
Given that estimated decommissioning costs are equal to twice the equity capital of the company (net of
these costs), small fluctuations in their estimation could have a significant impact on the value of the
company. Longer term financial security would be better served by creating a separate fund held in escrow
by an institution independent of the electricity company. Progress has been made in this direction as EDF
has begun building up a portfolio of dedicated assets. The opening to competition of the electricity market
will require a re-examination of the degree of security of these funds, with an eye to finding a mechanism
that ensures their availability at the moment when they are called upon.
Table 12. Long run marginal costs of power generation
Variation with the pre-tax cost of capital and externalities
Euro cents per kilowatt hour
Overall private costs
Externalities
Pre-tax cost of capital
5%
8%
10%
12%
Carbon
Health
Total
Nuclear power
Combined cycle gas turbine
2.8
3.4
3.9
4.4
0.0
0.0
0.0
4.0
4.1
4.2
4.3
0.2
0.4
0.6
Cogeneration
3.9
4.1
4.2
4.3
na
na
na
Coal
3.7
4.2
4.4
4.6
0.3
2.2
2.5
Wind
3.9
4.5
4.8
5.1
0.0
0.0
0.0
Notes: The following assumptions underly this table:
The nuclear programme consists of ten generators.
The gas price is USD 3.24 per Mbthu.
The coal price is USD 32.4 per tonne.
The capital cost of wind generation plant is EUR 907 per kw.
Study was based on 1995 prices and has been uprated to 2002 prices and concerns baseload electricity.
The exchange rate is USD 1.01 per EUR.
The results for a 10 and 12 per cent cost of capital have been obtained by extrapolation.
Estimates of external costs are taken from Externe and are based on a carbon price of EUR 15 per tonne.
Source: DIGEC (1997).
128.
France's current climate-change strategy relies mainly on domestic measures to reduce
greenhouse gas emissions. As the European directive concerning tradable emissions permits is put in place
by 2004, the range of options will widen. For France, the tradable permit system would cover between 20
and 25 per cent of national emissions, which should allow for a substantial reduction in the costs of
lowering pollution levels. Other than this community-wide measure, which is available only to large
industrial firms, the French anti greenhouse gas programme (adopted in January 2000) does not envisage
using the system of tradable credits created by the Kyoto accords to help achieve national GHG objectives.
As currently constituted, it is unlikely that new measures to reduce domestically produced transportation
based GHGs will be able to reverse the growth of these pollutants and, although estimates are not
particularly precise, such measures will doubtless be much more costly than the expected future price of
international carbon credits. Indeed, partial steps in the right direction would include making greater use of
distance based taxation in this area, allowing gasoline and diesel taxes to be aligned on carbon externalities
and introducing carbon taxes for air and sea transport, although here international co-operation would be
needed.
Reducing water pollution
129.
Clean drinking water is a vital commodity that depends in part on the quality and supply of
surface and ground water. Moreover, water is a valuable source of recreation and important input into
many economic activities. While pollution from industry and households is broadly in check, excessive
75
emissions from agriculture have pushed water quality below mandated levels in many areas. Besides
consolidating past achievements for industrial and domestic sources, the main issue is to find efficient
mechanisms to curb discharges from farming.
130.
A range of pollutants can adversely affect the quality of water. This section focuses on four key
pollutants, phosphates, oxygen depleting substances, (expressed as biochemical oxygen demand), nitrates
and pesticides. Phosphate concentrations in rivers have been trending downwards for two decades with the
decline starting earlier in urban areas. Concentration levels are still higher in urban areas than in rural
areas. The reduction in concentrations has not led to a fall in algae production (and eutrophication) in
rivers, as phosphate concentrations were not always the factor limiting algae growth. In urban areas, a fall
in industrial toxic waste has allowed more algae growth, even though concentrations have fallen. However,
in rural areas the falls in concentrations have lowered algae production. The biochemical oxygen demand
has therefore declined and this has resulted in a slight upward movement in the oxygen content of rivers,
with 85 per cent of rivers having enough oxygen to support salmon. Both these improvements are the result
of an increase in the number of households connected to primary or secondary sewage treatment facilities
(Figure 17), better treatment facilities and a reduction in the use of phosphates in detergents. For nitrates,
excessive concentrations have been stable over the past decade at 20 per cent of measuring stations, while
for groundwater the proportion has been lower at 10 per cent (Figure 18). High concentrations, relative to
the level of nitrates allowed in drinking water, are observed in a number of farming areas.50 For pesticides,
the standards for individual substances were originally set in the 1980s at the lowest level that could then
be measured and reflected a desire to eliminate pesticide concentrations in drinking water. These limits
were confirmed and even lowered for four pollutants in 1998. Judged by this standard, only 4½ per cent of
surface water is unpolluted, although here EU objectives are less strict calling only for “good ecological
status”. Indeed, less than 7 per cent of water contains a level of pesticides that precludes its use in the
domestic water supply (five times greater than the minimum level). In addition, French and EU legislation
each impsose an overall limit on pesticides in drinking waters.
Figure 17. Water quality of rivers and streams
A: Biochemical oxygen demand
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1990
Very Bad
Bad
Acceptable
Good
Very Good
1991
1992
1993
1994
1995
1996
1997
1998
1999
B: Phosphorus
100%
90%
80%
70%
Very bad
60%
Bad
50%
Acceptable
40%
Good
30%
Very good
20%
10%
0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Source: Data from Agences de l’eau – RNDE computed by IFEN, BNDE.
76
131.
Policies to address emissions are based on regulation and subsidisation, rather than economic
instruments. Livestock farmers are required to have sufficient storage capacity to stock animal slurry
during the year until the optimal time for application. Farmers have been encouraged to build storage
facilities by large subsidies.51 The high cost of this programme, more than double initial estimates, and
concern that the programme might be considered as an illegal state aid, have led to a reduction in subsidies
that are henceforth only to be paid in areas at risk of nitrogen pollution. Moreover, in areas classified as at
risk from nitrate pollution -- half the country according to EU definitions -- the annual input of nitrogen per
hectare (from organic and inorganic sources) has been capped at 200 kg per hectare, slightly above the
level set by EC directives. However, little enforcement has ensued and only a few of the farmers who
exceed limits have been brought to court.
Figure 18. Nitrates in underground aquifers
Share of aquifers at given quantity
Less or equal to 10mg/l
11 - 40
41 - 50
More than 50 mg/l
100
100
80
80
60
60
40
40
20
20
0
1992-1993
1997-1998
0
Source: Ministère de l’Aménagement du territoire et de l’Environnement (DE). Ministère de l’Emploi et
de la Solidarité (DGS). IFEN, September 2000.
132.
Some limited use has been made of pricing to reduce emissions of nitrates and pesticides. Large
livestock units are subject to tax on the amount of pollutants produced based on the average estimates of
emissions for different types of animals. However, the tax bill is reduced depending on agricultural
practices, with the result that tax payments are not related to emissions (MINEFI, 2001). The share of
agriculture in total payments of the water pollution tax was only 4 per cent in 1998. To ensure that the cap
on fertiliser application is respected, farmers are offered agronomic advice on the desirable use of nitrogen
inputs. This is unlikely to remedy a problem that does not stem from a lack of information but from the
absence of internalisation of pollution costs.52 On the other hand, pesticides have been taxed in line with
their toxicity since January 2000 -- in contrast to the regulatory limits on pesticides that take no account of
the relative toxicity of different pesticides. Preliminary assessments suggest that this tax is reducing the use
of the most dangerous products, but not by enough to stop the build up of pesticides in aquifers (CGP,
2001). However, the most commonly present pesticide (triazin) is being banned in 2003. There is also a tax
on detergents that varies according to their phosphate content.53
133.
While taxes are an efficient instrument to reach a given goal, objectives for water policy have
been set without adequate cost-benefit analysis. This is particularly the case for nitrates where large
investments have been made in drinking water treatment, whereas research suggests that in France the
77
environmental impact of this pollution is the more serious problem and the area where the largest potential
benefits are to be found. (Miquel, 2003). Here, wider use of economic instruments such as mandating
economic analyses and pricing based on cost-recovery principals, as called for in the 2000 EU Water
Framework Directive, as well as taxation in line with environmental costs would help improve the
efficiency of environmental efforts.
134.
The water treatment and distribution industry is spending increasing amounts both on reducing
their discharges and on treating water to ensure it conforms with norms (Figure 19). The cost of drinking
water distribution and wastewater are almost entirely borne by users, with metering almost universal
(Rideau, 2002). However, cost-recovery pricing of water provided by public distribution systems for
agricultural irrigation is much less developed than for domestic and industrial users. A tax on the discharge
of pollutants into rivers and lakes is paid to the regional water agencies. However, these taxes are based on
average pollution intensities for different products in a given industry. Consequently, investments that
reduce the pollution intensity of a given plant do not, in general, result in a decline in the tax to be paid by
the polluter.54 Equally, the tax paid by wastewater treatment plants depends not on actual discharges but on
average national emissions per household. If plants meet regulatory norms, then a rebate of the tax is paid.
Livestock farmers are subject to the pollution tax but paid only 4 per cent of the total tax yield in 1998. The
pollutant tax is subject to a number of drawbacks. The fundamental incentive effect of the tax has been
lost, as there is little link between actual emissions and the amount of the tax paid. In addition, the national
structure of the pollution tax means that there is no incentive to concentrate abatement investment in the
areas where the consequences of the pollution is the greatest. Finally, even with the limited need to
measure actual emissions, almost two-thirds of the revenue raised by the pollution tax is absorbed by
administrative and monitoring costs (Iteris, 2003). The regional water agencies use part of their revenues to
subsidise investments to reduce pollution. However, the agencies appear to give little weight to the relative
effectiveness of different anti-pollution investments. Rather the subsidies appear to be paid in order that, in
the long-run, each local authority receives subsidies in line with tax payments (Commissariat general du
plan, 1997).
Figure 19. Financial costs of water pollution
Current expenditure
Capital expenditure
Million euros
12000
Million euros
12000
Drinking water treatment and supply
Waste water services
10000
10000
8000
8000
6000
6000
4000
4000
2000
2000
0
1990
1996
1995
1998
1997
2000
1999
1990
1996
1995
Source: IFEN.
78
1998
1997
2000
1999
0
135.
The cost of complying with drinking water quality standards has been high. Given the mandated
levels of concentrations of certain chemicals in water, more effort is required to dissuade the original
emission of such pollutants. A first step would be to enforce existing legislation on the application of
fertiliser more effectively, especially in areas where nitrate concentrations are high. In addition, a means of
applying an effective tax to reduce excess fertiliser application needs to be found. It would need to have
low administration costs and to be applied ideally only in those areas where excess nitrates are a severe
problem. For non-farm forms of pollution, the current tax system does not generate a sufficiently clear link
between actual discharges and the amount of tax that is paid. As a result, the fundamental reason for
implementing the tax, to provide a price signal for decentralised decisions about investment in abatement
control, is absent. Moreover, such welfare gains from reduced pollution have to be set against the high
administrative costs of this tax. Price signals also ought to be strengthened in the area of pesticides and
phosphates. Finally, well-founded estimates of the public health and environmental benefits that would
flow from reductions in the nitrate, phosphate and pesticide concentrations in water are needed, otherwise
pollution tax rates cannot be set at efficient levels.
Summary
136.
France has made or is introducing a number of reforms that should improve the operation of the
economy and which should help contribute to raising both the level and rate of growth of potential output.
Nevertheless, more needs to be done. Table 13 summarises the evaluations made both in this and previous
Economic Surveys of various aspects of structural policy, progress that has been made since and the
OECD's current evaluation of policy in these areas.
137.
The preceding paragraphs have emphasised the changes required to raise younger and older
workers' employment rates. For youth, measures such as expanding access to the pension system, ensuring
that the relative value of the SMIC returns to earlier levels all work seek to better align the cost to firms of
hiring inexperienced and sometimes unskilled younger workers with their productivity levels. They do so
by providing them with work experience that raises that their productivity and by temporarily reducing the
costs and risks that firms must undertake in hiring such workers.
138.
For older workers, policy needs to focus on eliminating the substantial financial incentives which
encourage firms to layoff older workers, which is the principle reason for low employment among those 55
to 60. In so doing, it needs nevertheless to recognise the real problems faced by older workers who are
unemployed. Here instead of subsidising their non-employment, policy should perhaps consider
subsidising their employment -- perhaps by affording similar financial incentives to firms that hire
unemployed older workers as those currently provided for hiring younger workers. Moreover, in order to
help older workers maintain their skills at high levels, training and requalification programmes need to be
elaborated and made available.
139.
For workers that have reached retirement age, policy needs to eliminate the perverse features of
existing retirement schemes that destroy all financial incentive to continuing work after age 60 (with
40 years contributions). Current reform proposals go in this direction and should be implemented, although
even more flexibility could be imagined. Indeed, an actuarially neutral treatment of pension benefits for
those that retire early, along the lines of the one currently being proposed could be combined with a
reduction in early-retirement programmes to ensure that older workers that do lose their jobs have a
satisfactory income. Such a reform would be all the more attractive if complemented by the possibility to
simultaneously work and collect a pension.
140.
At the firm level, several policies have been announced to reduce red tape and increase the
effectiveness with which technology is diffused towards firms. These reforms go in the right direction and
should probably be reinforced. Reform to tax policy would also likely help contribute to improving
79
economic performance. High corporate and income tax rates likely influence investment decisions, while
rigid employment protection legislation may work to the disadvantage of small and fast growing firms.
Similarly, the authorities privatisation programme needs to be accelerated with proceeds being used to pay
down debt or build up the pension reserve. In particular, the State should disengage itself from large
partially privatised firms, like France Telecom and Air France, where its continuing presence, which
effectively prevents foreign firms from purchasing these companies, is perceived as introducing an element
of unfair international competition.
141.
Finally, in order to assure the long-term sustainability of growth, policy needs to come to terms
with a number of environmental issues. On climate change, efforts should seek economic instruments to
increase the likelihood that the current strategy of voluntary agreements will achieve the country's
emissions targets. In this regard, efforts may need to be concentrated at the supra national level. Current
policies to promote wind-generated energy sources appear to be un-economic and GHG objectives might
be better pursued through the use of trading permits. As concerns water pollution, policy needs to deal
more forcibly with the problem of nitrate pollution from agricultural sources, partly by enforcing existing
rules and partly by introducing dissuasive taxes. For pesticides a more disaggregated regulation is required,
which distinguishes between the toxicity of different molecules and which imposes concentration limits
more in line with levels considered harmful.
80
Continue the reform of early retirement and eliminate
recourse to the unemployment insurance system as a form
of subsidised early labour-market withdrawal.
The share of public support to early retirement pensions
has been scaled down somewhat.
Continue to scale back early retirement schemes, which
deprive the economy of experienced workers. Make the
definition of “arduous” jobs more precise.
81
Continue to give priority to measures that increase the
employability of the jobless in the market sector. Extend
the scope of on-the-job training programmes.
The issuance of youth employment (emplois-jeunes)
contracts has been ceased and replaced with increased
assistance to private-sector firms hiring unemployed
youth with low educational qualifications. Various forms
of abatements on social charges have been harmonised.
Look at the conditions for the re-employment of young
people and adults on the fringes of the labour market.
Continue efforts to make the activation efforts of the
public employment service more effective. Making
acceptance of a job offer under the RMA a condition for
benefit would help.
Restrict increases in SMIC to inflation following
harmonisation so as to realign it with average wages and
promote demand for low-skilled workers.
OECD comments
The employment premium (prime pour l’emploi) has
been increased and made available to part-time workers.
The authorities are considering introducing a minimum
revenue of activity (Revenu minimum d’activité, RMA) to
help long-term unemployed get gainful employment.
Introduced measures to raise the SMIC by 11.6 per cent
in real terms over 3 years in an effort to harmonise
multiple minima created by the implementation of the
35 hour workweek.
Measures since the last Survey
Reduce the risk of unemployment and poverty traps,
particularly for those receiving basic income support.
Reform the unemployment benefit system
Reassess the level of the SMIC minimum wage. Index it
on consumer prices instead of wages.
Reduce wage costs for unskilled labour
I. Labour market
Previous recommendations
Table 13. Overview of progress in structural reform
Enhance competition in network industries
II. Product market competition
The application of the 35-hour work week to SMEs needs
to be made flexible.
Make the shift to the 35-hour week more flexible
Evaluate active labour market policies on an ongoing
basis.
Enhance active labour market policies
Ease the restrictions on the renewal of fixed-term
contracts. Introduce 5-year fixed-term contracts.
Simplify the administrative regulation of the labour
market
82
EU regulations on competition in the electricity sector
have been transcribed into French law. The historic
electricity and gas monopolists (EDF and GDF) are being
transformed into joint stock companies. Commercial rail
activities have been opened to competition.
The overtime contingent was increased by 20 hours and
the related overtime premium reduced.
The Ministry of Labour and Solidarity regularly follows
up on the labours market performance of programme
participants and published much of its research.
Redundancy procedures under the social modernisation
bill have been temporarily suspended.
Extend the scope for competition in the electricity and gas
sectors to all consumers; open up rail transport and postal
services to competition. The need for further progess in
privatisation of network firms remains.
Consider eliminating overtime premia for first four
weekly over time hours.
Pursue efforts to make results transparent particularly as
concerns the analyses of the strengths and weaknesses of
schemes and prescriptions for further reforms.
Make these changes permanent. Pursue effort to revise
the "contribution Delande". Reduce the disparity of the
conditions imposed on fixed and indefinite-term
contracts.
Public service targets in telecommunications and
electricity have been defined in detail and costed so as to
ensure funding that is compatible with competition.
The authorities are considering amending rules of the so
called Loi Galland that distorts the way large retail
companies set prices.
The Competition Council hands down numerous opinions
in many areas, but cannot on its own initiative inquire
into anti-competitive practices.
Apply regulations that protect consumers and ensure
supply security in a pro-competitive manner.
Relax rules governing large and medium-sized stores
Increase the legal and material resources available to the
competition authorities.
Measure have been undertaken to increase incentives for
innovation, including the establishment of network of
industrialists and research laboratories.
Efforts to stimulate R&D
83
New initiatives seek to increase the rate at which new
enterprises are created and improve access of small and
medium sized firms to capital and expertise.
Support to the creation, financing and efficiency of small
and medium enterprises
III. Policies to favour firms creation and expansion
A new holding structure (Agence des Participation de
l'Etat, APE) has been created with a view to improve the
management of state commercial assets. Several large
scale asset sales are planned.
Improve governance of state-owned firms and speed up
privatisation
Ensuring that a certain proportion of revenues from
licenses goes directly to the discoverers.
Continue to support the reduction of administrative
complexity by extending one-stop internet solutions for
registering a new business.
Give the Competition Council the means to take up
anti-competitive practices on its own initiative. Extend
these prerogatives to areas where competition is restricted
because of public service responsibilities.
Relax zoning and price competition rules so as to permit
savings from economies of scale to be passed on to
consumers.
Apply this approach to opening up all network industries
to competition.
Break the linkages between State-owned firms and their
ministry-owners and make the APE more independent of
the State bureaucracy. Speed sales of state assets,
including minority stakes and use proceeds to reduce
debt.
None.
The marginal rate of income tax has been lowered.
Abolish expensive to collect taxes
Reduce taxation for people with middle and high
incomes.
84
Detailed recommendations concerning the reform of the health system were made in the (2000) Survey. Chapter III updates the discussion and the recommendations that follow
from that are presented in a special Recommendation Box at the end of that Chapter.
V. Health reform
The authorities propose raising contribution periods of
civil servants to levels in the private sector.
Ensure greater equity between public and private pension
schemes.
Implement proposals but also take steps to reduce the
implicit subsidy of civil servant pensions by raising
employee contribution rates
An actuarially neutral early retirement scheme could be
used to replace subsidised schemes operated by the
UNIDIC and the State.
The authorities have proposed to introduce a system of
surcotes and décotes so as to reduce disincentives to work
beyond the retirement age.
of
pension
methods
Promote actuarially
calculation.
neutral
Increase collective savings to fund future pensions
expenditure. Use privatisation revenues to build up
pension reserve fund.
A pension reform is underway, which remains pay-asyou-go but which opens up new opportunities for private
savings.
Overall tax burdens are still excessive for certain
categories of income. The health insurance contribution
should be subject to a ceiling.
The cost of collecting certain quasi-taxes remains
excessive in relation to the proceeds (e.g. the television
licence fee). Do away with them.
Bring corporate income tax rates down towards the
European average also with an eye to making the tax
treatment of small and medium enterprises more neutral.
Restore the sustainability of long-term pension schemes
by introducing forms of collective capitalisation or
employee savings schemes.
IV. Pensions
The rate of corporation tax has been reduced, but remains
above the average for the other European countries.
Ease the burden of tax and social insurance contributions.
III. Taxation
Additional bus and bicycle corridors have been created
Increase intra-governmental coordination to reduce urban
traffic levels.
85
Various policies have been introduced in the realms of
reducing emissions in the industrial sector, the transport
sector and in the electricity sector. But the implicit
subsidy on wind-generated energy is much higher than
costs associated with alternative techniques for reducing
greenhouse gases.
Align existing environmental taxes more closely to the
cost of externalities and ensure that economic evaluation
is undertaken to this end.
None
The authorities are pursuing voluntary agreements
of
Introduce a tax or cap and trade scheme for greenhouse
emissions in a revenue neutral manner
costs
None
with
Increase tax levels on emissions from sea and air
transport.
taxes
None
environmental
Subject diesel fuel to a similar tax treatment as petrol
Better align
externalities
VI. Environment
Continue to implement measures and create explicit
traffic and pollution objectives.
Where costs remain excessive policies need to be
reshaped. Ensure a central role for permit trading at the
EU level
Closely monitor voluntary agreements to ensure
effectiveness, consider introducing a tax or making use of
tradeable permits. Ensure that voluntary agreements are
based on independently determined reference scenarios.
Currently, sources of greenhouse gasses are undertaxed.
Accelerate international discussions to introduce
environmental taxes on fossil fuels used for these
purposes.
Ensuring such a treatment appears reinforced by that the
persistent difference between petrol and diesel tax rates is
unjustified both from the point of view of greenhouse
gases and other pollutants.
Implement the recommendation
None
None
None
None. Current regulations do not distinguish adequately
between the toxicity of different pesticides.
Cease attributing the revenues from water to finance local
depollution efforts
Enforce existing regulations concerning nitrogen inputs
Subject agricultural nitrogen inputs to taxation
Reform regulatory limits on pesticides and adjust tax rates
in line with toxicity
86
None
Implement tax on excess nitrogen
Source: OCDE.
None
Introduce tolls to limit peak-period traffic levels in major
urban areas
Implements separate limits for different molecules and
adjust tax rates in line with the environmental damage
caused
Implement the recommendation taking into account that
at present tax levels on nitrogen content of commercial
fertilisers are much lower than the environmental cost that
their use imposes
Implement the recommendation with a view to ensuring
that taxes are better aligned to externalities to externalities
provoked and subsidies allocated
Implement the recommendation. The tax should be
differentiated by zone as a function of environmental risk
III. PUBLIC EXPENDITURE MANAGEMENT
142.
The past 50 years have seen the role of the public sector change dramatically in France. As the
economy grew and society became richer, the public sphere took on increasing responsibility for providing
services to the population. For the most part, responsibility for administering the delivery of these services
has been delegated to the social partners and sub-national levels of government. As a consequence, the
share of the State Budget in total spending has decreased in line with the increase in government
expenditure. These developments reached a point in the 1990s where the taxes required to pay for all of
these programmes was increasingly recognised as having reached unacceptably high levels. This, plus the
growing awareness that the ageing of the population would put substantial additional demands on the
public purse (while at the same time slowing the pace of economic growth), appears to have brought the
course of public expenditure in France to a turning point. For several years now the authorities have sought
to control the expansion in government spending, with limited success. This chapter examines the tools
available to the authorities to manage public expenditure, with a view to recommending reforms that will
simultaneously help preserve fiscal sustainability and allow society to enjoy the high level of public
services to which it has been accustomed.
143.
The remainder of this chapter is organised as follows. A first section situates public expenditure
both internationally and over time. It is followed by a short description of factors likely to influence public
spending over the next several decades. A brief description of the institutions of public expenditure in
France and the budget process is then followed by a longer section outlining areas where policy reform
might improve the capacity of existing institutions to respond to tomorrow's challenges. A final section
summarises the recommendations of this chapter.
Spending in international comparison
144.
At the beginning of the 1970s total general government expenditures in France were equal to
40 per cent of GDP (Figure 20, Panel A), 8 percentage points higher than the OECD average at that time
but close to the average of current-day EU countries. During the following decades they increased rapidly,
peaking at about 55 per cent by the mid 1990s.55 Most recently, the share of public expenditure in output
has stabilised (on a cyclically adjusted basis), although at 54 per cent of GDP, it is still the third highest in
the OECD, 16 percentage points higher than the OECD average and 8 percentage points above the
European Union average (Figure 20, Panel B). To a certain extent this comparison is influenced by the fact
that some countries provide health, education and pension services through the private sector, whereas
these are provided by the general government in France. Indeed, France spends the fifth highest share of
GDP on merit goods (government services), with relatively high expenditure shares for education, health,
services for the elderly and other family services (Table 14). However, even after excluding such spending
France’s public expenditure share remains one of the highest in the OECD (seventh).
87
Figure 20. Public expenditure
Per cent of GDP
70
70
A. Trends in public spending by economic category
Social security benefits paid by government
Capital outlays
Other spending
Gross interest payments
60
50
60
50
40
40
30
30
20
20
10
10
0
1970
1975
1980
1985
1990
1995
0
2000
70
70
B. General government expenditures, 2002
Korea
Ireland
Australia
United States
Spain
Japan
Canada
United Kingdom
Luxembourg
0
Czech Republic
0
Greece
10
Portugal
10
Norway
20
Netherlands
20
Italy
30
Finland
30
Germany
40
Belgium
40
Austria
50
France
50
Sweden
60
Denmark
60
145.
The increase in spending mainly reflects rising primary expenditures (total spending less interest
payments), which increased by 12 percentage points over the period in question to 50 per cent of GDP in
2002. More than half of the increase represents growing transfers, both as a result of rising unemployment
and an expansion of both the coverage of and replacement rates in the social security systems (Figure 21).
From a functional point of view, France spends more than any other OECD country on income transfers,
with disbursements on old age and survivors’ pensions and unemployment among the highest in the
OECD. Currently, 62 per cent of French citizens live in households that receive at least one social benefit56
(Marlier and Cohen-Solal, 2000). Including pensions, raises this ratio to 80 per cent.
88
11.5
12.8
OECD average3
EU average3
4.9
6.4
6.0
8.2
4.6
5.1
..
5.3
6.6
7.7
5.0
5.6
5.8
5.4
5.8
6.1
6.6
6.5
6.8
5.3
7.3
7.8
4.7
7.0
4.6
5.5
5.6
2.4
5.4
2.0
5.9
6.1
7.1
Health
0.7
0.4
3.9
0.2
0.3
0.4
0.3
3.7
0.7
0.1
0.8
0.0
0.8
0.9
0.1
..
0.5
3.0
1.5
0.7
0.7
0.3
2.1
0.4
0.2
0.3
0.2
0.5
0.0
1.3
0.0
3.4
Services
for the
elderly
disabled
people
0.7
0.4
1.6
..
0.3
0.1
0.1
1.7
0.1
0.1
0.5
0.3
0.4
1.1
0.2
..
..
2.2
1.4
1.2
0.8
0.7
1.1
0.2
0.3
0.3
0.1
0.4
0.1
0.4
0.1
1.4
Family
services
17.9
12.3
17.6
18.4
12.5
13.3
13.9
18.9
19.9
9.1
17.8
8.2
10.2
19.0
18.1
11.2
12.7
17.8
18.3
19.7
18.0
16.9
8.2
10.6
19.1
8.4
3.3
15.2
6.0
16.1
13.8
15.2
Total
9.9
7.0
6.9
8.1
6.3
5.3
8.1
7.5
11.2
5.1
9.8
5.1
4.0
9.9
7.3
5.0
6.7
6.8
7.0
10.6
10.5
10.2
3.8
2.5
12.8
5.7
1.9
7.8
4.7
6.2
5.2
6.0
Old-age
pension
1.3
1.1
0.4
2.1
1.4
1.0
0.8
0.7
1.4
1.2
1.0
0.9
0.2
2.9
2.5
0.5
0.9
0.0
1.0
1.6
0.5
2.0
0.5
0.9
2.6
1.1
0.2
0.9
0.1
0.8
0.1
0.4
Survivors
pension
1.6
1.2
3.3
4.8
1.9
2.0
1.3
2.4
2.9
0.2
2.7
0.9
2.1
2.3
1.7
0.9
1.8
2.0
3.1
1.1
1.4
1.1
1.5
0.8
1.0
0.5
0.4
2.4
0.1
2.4
1.5
2.8
Disability
0.5
0.3
1.7
1.1
0.5
1.2
0.9
1.1
0.5
0.0
0.1
0.2
0.0
0.2
0.4
0.1
0.9
0.7
0.4
0.5
0.3
0.8
0.1
0.7
0.7
0.1
..
0.7
..
1.0
1.3
1.5
Sickness
Income transfers2
1.4
0.8
2.6
0.9
0.6
1.8
0.3
1.6
1.2
1.0
1.7
0.2
2.2
1.9
2.0
0.8
1.6
1.5
1.9
1.5
1.9
1.2
1.2
1.6
0.6
0.2
0.0
2.3
0.0
0.8
2.4
2.2
Family
cash
benefits
2.3
1.2
1.6
1.0
1.6
0.8
2.2
3.9
1.8
1.0
0.6
0.4
1.5
1.4
3.8
1.4
0.5
5.0
3.9
3.1
2.6
0.7
0.5
2.9
1.4
0.7
0.6
0.8
0.1
3.9
2.2
1.4
Unemployment
89
Or 1998 when not available. Education data always concern 1998.
As indicated in Adema (2000) the interaction of the tax and benefit systems complicates the interpretation of the relative generosity of these transfers, as benefits are taxed in some
countries but not others.
3.
Weighted average based on 1995 GDP and purchasing power parities (PPPs), excluding Korea, Luxembourg, Mexico and the Slovak Republic and using Norway total.
Source: OECD, Social Expenditure Database and OECD, Education at a Glance, 2001.
1.
2.
7.8
5.3
5.6
..
4.4
6.6
5.4
2.9
4.6
4.8
21.5
10.2
11.3
0.5
10.2
18.6
13.9
8.2
11.6
11.0
4.7
4.3
6.0
5.0
5.5
4.1
6.8
5.7
5.9
4.4
3.4
6.5
4.3
4.8
3.6
4.1
..
4.1
4.5
6.0
6.8
10.9
13.8
11.4
12.1
11.1
18.8
14.0
15.0
13.7
9.1
16.8
9.5
10.8
9.8
6.7
6.3
6.3
12.1
12.3
18.6
Education
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Greece
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Norway
(using mainland GDP)
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
Total
Merit goods
Table 14. Major current government outlays
1
1999 , per cent of GDP
Figure 21. General government primary expenditure by economic category
Per cent of GDP
70
70
Social benefits
Subsidies
Other current transfers
Wage consumption
60
Non-wage consumption
Other operating expenses
Property income paid
Primary expenditure
60
50
50
40
40
30
30
20
20
10
10
0
1970
1975
1980
1985
1990
1995
2000
0
146.
As the role of the government expanded, public-sector employment also grew, from 3.7 to
5.9 million between 1970 and 2002, when it represented 24 per cent of total employment. As a result, the
government wage bill yielded the second largest increase in spending shares, representing about one third
of the total increase over the period. As deficits accumulated and interest rates rose, debt servicing charges
also picked up, although during the 1990s these have declined both as a result of reduced debt levels and
lower interest rates. National accounts data suggest that France spends about 1.3 per cent of GDP on
subsidies of all sorts although if tax expenditures were included, this would be much more.
The challenges ahead
147.
As elsewhere in the OECD, the ageing of the population will significantly determine both the
nature of public expenditure and France's ability to finance it over the next several decades (see Chapter I).
During the next 30 years, the population over 65 years of age is projected to increase by almost 75 per
cent, while the working-age population (15-64) will be broadly stable or decline.57 As a result, the old-age
dependency ratio is expected to increase from about 2.4 workers per person over 65 to 1.5 workers in 2030
and 1.3 workers by 2050. Taking into account the high incidence of early retirement and the official
retirement age of 60, the ratio of workers per retiree is expected to decline from 2:1 to 1:1 by 2030. In the
absence of reforms to the pension system, ageing is expected to increase the pension system’s funding
shortfall by 8 per cent of GDP. Even assuming substantial improvements in labour force participation and
unemployment rates, rising pension expenditures are expected to increase the deficit by 4.7 per cent of
GDP (COR, 2001). Meanwhile, even if age-specific health expenditures rise only as fast as GDP, the
purely demographic impact of ageing on health costs would be 1.9 per cent (Economic Policy Committee
of the European Union, 2000) between now and 2050. If recent health cost trends were to persist this
projected deficit would be very much larger.
148.
The challenge of ageing for the state as an employer is even more acute. Over the next 15 years
some 900 thousand workers are expected to retire or 41 per cent of State-sector workers.58 While this
outflow represents a substantial opportunity to restructure the civil service by not replacing retirees in low
priority areas, overcoming insider’s opposition to any reduction in their numbers will not be easy.
149.
If France is to make a successful transition to this more constrained fiscal environment, it is
essential that policy makers develop tools that permit all areas of public expenditure to share the burden of
creating the necessary fiscal room. Given the State Budget’s shrinking share in total spending, it will be
impossible to meet the spending pressures of the next several decades unless social security and sub90
national spending are restrained. Moreover, in order to prevent vested interests from blocking necessary
reforms, efforts need to be made to clarify the roles of the State and the Social Partners in the governance
of the Social Security system. In this regard, recent experience during which several reform efforts were
withdrawn following widespread popular protests is not promising. The kind of extended consensus
building that has preceded current efforts at pension reform might represent a model for the future, but its
success has yet to be demonstrated. Whatever mechanism is used to achieve agreement, the need to avoid
gridlock in the future is essential if authorities are to be able to make the sometimes difficult choices that
will need to be made.
150.
Finally, the ongoing reform of the State represents an important challenge. In this regard, the
implementation of the new framework law for the State Budget (Loi Organique Relative aux Lois de
Finances, LOLF) will be difficult. Reorienting the focus of the State Budget process towards outputs and
policy objectives rather than just on the inputs into public service delivery involves substantial changes in
“corporate” culture, which experience from other countries suggests are not easy to achieve. Here, the
phase-in of new procedures by 2005 represents an ambitious schedule. Ultimately intangible factors
impacting on the degree to which the spirit rather than the letter of the law is adopted and implemented
may determine the extent that this innovation succeeds in increasing the efficiency with which public
services are provided. Similarly, the results of the authorities’ initiative to decentralise service provision
and improve the matching between the financial and administrative responsibilities underlying programme
delivery will determine to what extent the efficiency with which services are delivered can be increased.
Moreover, if such steps are to help create fiscal room, mechanisms to ensure that savings are not spent
elsewhere will need to be found.
Budgetary process and arrangements across levels of government
151.
France is a unitary state, which nevertheless has several levels of sub-national government
(collectivités territoriales): these include 36 763 municipalities (communes), 100 departments and
26 regions (Table 15). In addition, the state has some 1 400 extrabudgetary institutions, with activities
ranging across commercial, educational and cultural domains (Box 7). While the municipalities and
departments date back to the French Revolution, the regions were created in the mid-1980s. From the point
of view of expenditure, the general government is comprised of the state budget, these sub-national
groupings and various extrabudgetary funds principally concerned with social security. Overall the State
budget represents only 37 per cent of general government expenditure, while extra budgetary funds
represent 45 per cent. The remaining 19 per cent is accounted for by the activities of sub-national
governments (Figure 22).59
Figure 22. Expenditure shares by level of government
2001
37% Central government
45% Social security
19% Local administration
Source: Ministry of Economy, Finance and Industry and OECD.
91
Table16. Organisation of the public sector in France
State
Central
government
Public
sector
General
government
Directions d'administration centrale (Central administrative
directorates)
and
Services
à
compétence
nationale
(Administrations under national competence). The main
responsibilities of the Directions are analysis and projections of
public needs; draft of regulations and laws, including the Budget;
management, co-ordination and supervision of the local
administrative branches of the state; evaluation of the impact of
public policies impacts. The responsibilities of the services à
compétence nationale are: the legal system, management of
National museums, the fight against illegal immigration, and
production of specialised studies. They also ensure the provision
of numerous operational services.
Services déconcentrés de l'État (local services of the state) are
the purview of the préfets (prefects) who are directly appointed
by the government. They are responsible for the implementation
of all national civilian policies (education, culture, agriculture,
etc.), and for police.
Other entities
of the central
government
Établissements publics à caractère administratif, EPA (public
agencies with a service and administrative vocation), i.e. the
securities commission, the national school of administration
(COB –Emmissions des opérations de bourse, ENA –Ecole
nationale d’administration, etc.).
Établissements publics à caractère scientifique et technologique
EPST (public agencies with a scientific and technological
vocation), i.e. the CNRS, national research institute, etc).
Établissements publics à caractère scientifique culturel and
professionel, EPSCP (universities, national museums, etc).
Regional
and local
governments
Social
security
Local
administrations
They include municipalities (communes), departments
(départements), regions (régions) and various entities
responsible for local co-operation initiatives.
Other local
entities
Locally financed non-market entities (for example, primary and
high schools, Chambers of commerce, etc.).
Social
insurance
schemes
They include 37 mandatory schemes, or régimes, each
managing at least one of the following classes of risks:
healthcare (both medical treatments and wage replacing per
diem sickness benefits); retirement and survival (including
complementary regimes); family and maternity; housing benefits;
poverty and social exclusion. In addition, the special financing
funds (FSV, FFR, etc.) are included.
Though administratively and financially more independent, the
UNEDIC (Union nationale inter-professionnelle pour l'emploi
dans l'industrie et le commerce), which is responsible for
unemployment insurance, is also part of the social insurance
system in the national accounts classification.
Large
publicly
owned
enterprises
Entities
Example, public hospitals.
administered
by the social
insurance
schemes
RFF, railways infrastructure, SNCF, railway service, ADP, Parisian airports, RATP, Paris public
transport network, France Telecom, La Poste, EDF/GDF, energy network. These entrerprises have
status of Établissements publics à caractère industriel et commercial, EPIC (public agencies with
an industrial and commercial vocation).
Source: OECD.
92
Box 7. Fiscal relations between levels of government
In France, both the central government and the local authorities comprise several levels of governments
(see Table 15).
Central government
The central government operates at three levels: central services, local services of the central government
(services déconcentrés de l'État), and Public establishments (établissements publics de l'État). Overall,
State employees represent 73 per cent of all public-sector employees with most of them employed at the
level of administrative districts.
The central services are provided by and operate under the direct authority of Ministers, deputy Ministers
and State Secretaries, and mainly provide technical support functions.
Local state services are provided by administrative districts (circonscriptions administratives), which differ
from the local governments (collectivités territoriales, see below) in that, while the former are run by
prefects, who are directly appointed by the government, the latter are autonomous entities, administered
by locally elected assemblies.
The prefects channel all relations between the state and the local authorities. They have the power to
review local government by laws and are responsible for the implementation of all national civilian policies
(culture, agriculture, etc.) and the police. In addition, they help monitor the application of national
regulations and community services. Finally, they can order modifications to sub-national budget proposals
if they do not comply with budgetary rules. In municipalities, however, for certain functions, such as those
concerning vital statistics, the state is represented by the mayor.
Public Establishments (of which there are 1 400) are moral persons placed under separate public code.
Although they enjoy a certain degree of financial and managerial autonomy, they report to at least one
ministry which appoints the management, supervises strategic decisions and decides upon the allocation
of subsidises. There are different kinds of Public Establishments involved in activities like education, R&D,
cultural promotion, social protection and solidarity, work and employment, construction, urbanism and
environment. These activities are all part of the general government. A wider definition of the public sector
also comprises a number of large publicly owned enterprises involved in public transport, the postal
network and energy.
Local governments
There are also three levels of local governments: municipalities (communes), departments (départements),
and regions (régions).
The municipalities are responsible for local matters such as town planning, municipal infrastructure,
subsidised housing, local public services (waste treatment, water, public transport, lighting), health and
social services, education (operation of primary public schools, their construction and their maintenance),
cultural affairs (museums and theatres), security, public order, hygiene, aid to employment and to business
(subject to EU competition rules).
The departments focus mainly on departmental roads and the management of everyday affairs, such as
welfare benefits, health care benefits, job placement for the unemployed, secondary education, local
transports.
Finally, the regions, are mainly responsible for land-use planning and economic development: vocational
training; secondary education; rail and waterway transport; and aid to development.
In its role as the administrator of the local governments' receipts, the State collects local taxes, a mission
that it accomplishes relying upon its own information network. While the State is committed to provide local
governments with the full extent of the budgeted revenue envelope it does this at a fee. Own local tax
receipts still represent a small proportion of total local tax revenues.
93
The State budget
152.
The State budget is annual, although the obligation to produce a three year budget projection in
the context of the Stability and Growth Programme has introduced a multi-year element to the process. The
elaboration of the Budget begins the year before with the closing of the previous year’s accounts. The
Ministry of Finance (Ministère de l’Économie, des Finances et de l’Industrie, MINEFI) proposes to the
cabinet a very aggregated budget based on a preliminary set of spending priorities and a macroeconomic
framework (Table 16). Documentation is streamlined and focuses on functional priorities, rather than
detailed spending chapters. Once the broad lines of the budget are approved by the cabinet, including
global revenue and expenditure envelopes, the Ministry of Finance proceeds to elaborate a more detailed
budget, negotiating with line ministries and the cabinet concerning allocations between ministries (cadrage
budgétaire). Once approved by cabinet, this draft budget (Projet de loi de finance, PLF) is presented to
parliament -- no later than early October.
153.
The Budget itself is relatively detailed and is supported by a variety of additional documents, the
so called bleus and jaunes (blue and yellow papers), which are appended to it. The jaunes are usually
distributed after the PLF but early enough to contribute to parliamentary discussions. They consist of
policy oriented discussions of various topical issues. Thus, in 2003, areas covered included the social role
of the state, national defence, and audio-visual broadcasting policies. The bleus are distributed with the
PLF and provide technical information concerning:
−
the macroeconomic forces shaping the government's economic forecast;
−
expected fiscal and quasi fiscal revenues (including tax expenditures), distinguishing between
revenues based on unchanged policies and the impact of new measures;
−
transfers and earmarked revenues allocated to specific extra budgetary funds;
−
separate annex budgets for six entities dependent upon the state, most notably that of
agriculture social fund (Budget annexe des prestations sociales agricoles, BAPSA);
−
finally, an outline of expenditures by individual chapters (of which there are 840), each one
distinguishing between pre-existing and new spending appropriations.
154.
Parliamentary debate of the budget passes through three readings and must be completed before
the 31st of December. Historically, Parliament has had only very limited powers to amend the Budget.
With the introduction of a new framework law in 2001 (see below), Parliament may now propose
amendments to spending within Budgetary missions (large areas regrouping government objectives) but
not between them. As a consequence, it cannot revise the total level of spending and cannot reallocate
money from large spending items such as defence to education, for example. Nevertheless, the ability to
affect allocations within missions is an important new power.
155.
The French budgetary system includes a tight treasury function, with a complex and relatively
heavy process of ex ante and ex post controls conducted by various departments within the Ministry of
Finance. The process includes a sharp distinction between the person who authorises an expenditure
commitment and the one who authorises payment. Spending authorisations are made by line ministry
spending officers (ordonnateurs). Before such authorisations may be executed they must be approved
ex ante by the financial controllers employed by the Ministry of Finance but physically located in
ministries. The expenditure is subject to a third verification by Ministry of Finance accountants prior to
authorisation of payment. Finally the whole process is subject to ex post audit by the General finance
inspectorate (Inspection générale des finances, IGF) and also the National Auditor (Cour des Comptes).
Moreover, the National Auditor provides regular examinations of the effectiveness of government
programmes.
94
Table 16. Preparation of the State budget
PHASE
REFERENCE
PERIOD
OBJECTIVES
ACTIONS UNDERTAKEN
To finalise multiyear (n+3)
budget commitments with the
European Commission based
on expected macroeconomic
developments;
Multiyear budget programme prepared jointly by the
Forecasting Directorate (Direction de la Prévision)
and the Budget directorate (Direction du Budget) and
sent to the European Commission;
A. Global budgetary strategy
Projections
December (n-2) -mid
March (n-1)
To review budgetary needs for
the year n on the basis of
current policies (budgets de
reconduction).
Framework letter
(Lettre de
cadrage)
Mid March-mid April
Sectoral divisions of the Budget Directorate prepare
sector specific spending dossiers for the year n.
Budget Directorate transmits a budget summary note
to the Economy Minister.
To set out budgetary policy for
the year n in light of the
announced macro economic
projections.
Inter-ministerial debate
To allow Ministries to express
and discuss their priorities;
Ministries' representatives meet with the Budget
Directorate's vice-directors who are responsible for
negotiating specific budgetary allocation issues
(Conférences budgétaires).
After consultation with the Minister of Finance, the
Prime Minister signs a framework letter and sends it
to line Ministries
B. Budget definition
First stage
Mid April-May
To allow the Direction du
budget to evaluate such
priorities in light of the
government's global priorities.
Arbitration
(Arbitrage)
June
To set out a list of unsettled
spending issues;
To eliminate as many
elements of disagreement as
possible.
Ceiling letters
(Lettres-plafonds)
July (first half)
To summarise the terms of the
various arbitration agreements
concluded;
Based on the of the outcomes of the Conférences
Budgétaires, the Budget directorate transmits an
arbitration document (dossier d'arbitrages ) to the
Finance Minister;
The Minister of Finance discusses unsettled issues
bilaterally with the other Ministries.
The Ministry of Finance sends a detailed ceiling letter
to his colleagues.
To define each Ministry's
budgetary means.
Second stage
Mid July-September
To fix final spending details;
To assess budgetary
revenues;
To calculate the budget
balance;
To draft Ministry specific
budget documents;
Ministries' representatives have supplementary
(mainly technical) meetings with the Budget
Directorate's representatives (Conférences
Budgétaires de "deuxième phase);
Technical/legal work within the Ministry of Economy
focussed on the revenue side;
Finalisation of budget documentation.
To draft the general budget
(PLF, projet de loi de finances)
Official
presentation
End-September
To adopt and diffuse the PLF
Council of Ministries adopts the budget,
Submission to
Parliament
(Saisine du
Parlement)
October-December
To ensure that Parliament
receives, discusses and votes
the PLF
The PLF is deposited in the office of the President of
the Assemblée Nationale before the first Tuesday of
October and it is thereafter transmitted to the Sénat.
Submission to the
Constitutional
Council
(Saisine du
Conseil
Constitutionnel )
October-December
To ensure that the PLF
respects legal requirements
The PLF is submitted to the scrutiny of the
Constitutional Council.
Publication
December
To publish the Loi de finances
on the Official Journal.
Publication to be done before the 31 of December of
the year n-1.
PLF is presented to the press.
95
156.
In the course of the budgetary year, the Ministry of Finance has significant, although not
unrestricted, powers to revise budgetary allocations as needed. It enjoys wide discretionary powers to
transfer appropriations within and across line ministries, provided that this does not change the nature and
the amount of the budget. The Ministry of Finance (acting for the government) can freeze credits awarded
to any given Ministry and has the power to formally declare a given programme "without object", an action
that entails the immediate cancellation of any related spending appropriations. However, the total of such
cancellations cannot reduce total expenditures by more than 1.5 per cent of initially authorised credits,
unless parliament passes a revised budget (Loi de finances récapitulative), which can also be used to
authorise additional expenditure. All in all, approximately 20 per cent of Budget chapters are modified in
this way during the course of a year by government decisions (Chevauchez, 2002).
Sub-national governments
157.
Budgetary rules at the sub-national level are much more restrictive. The regions, departments and
municipalities, must present balanced budgets (équilibre réel). In practical terms, this means that their
operating budgets (section de fonctionnement) must be in surplus and this must be large enough to fully
cover planned capital expenditures (section d'investissement), and, except for municipalities with fewer
than 3 500 citizens, projected debt payments during the year (interest payments, depreciation costs and
expected realisations of contingent liabilities). The fiscal year for sub-national budgets is the same as for
the State, but local governments do not need to adopt their budget until the end of March (well into the
current fiscal year).
158.
The State exercises the treasury function for local governments, providing them with equal
monthly instalments according to their initial budgets. Local taxes are collected by the State. Although
local governments have some limited ability to choose rates applied to some tax bases, own revenues
account for less than 5 per cent of all revenues. Payments are made irrespective of how tax revenues are
evolving. Moreover, local authorities are not free to manage their non-tax revenues, but must deposit them
in State Treasury accounts operated by the Bank of France. Their expenditures are subject to a similar ex
post and ex ante financial control process, except that the ex post audit function is conducted by the
regional audit courts (Chambres régionales des Comptes). Prefects can, based on a finding of the regional
audit court, require that missing expenditures be inserted into the budget law.
159.
Historically these restrictions have ensured the overall balance of the sub-national level of
government.
Social protection
160.
The draft Social security budget (Projet des lois de financement de la sécurité sociale, PLFSS)
sets forth the expected revenues and expenditures of the various healthcare, pension and social assistance
funds (Box 8). The PLFSS is presented to parliament immediately after the draft State Budget and is based
on the same underlying macroeconomic and revenue assumptions. The two budgets are debated more or
less simultaneously so as to emphasise their interdependence and the tradeoffs that there may be between
them. In this respect the PLFSS, which was introduced in 1996, is a recent innovation that seeks to impose
a degree of parliamentary oversight over social security expenditures that did not exist previously.
96
Box 8. The social security system
Structure of the social security system
Most of the French social security system is administered by extrabudgetary funds. There are some
37 social security schemes (régimes), which include general and professional health insurance, workman’s
compensation and invalidity insurance; old-age and survivors insurance and social assistance. In addition
an unemployment insurance scheme and some elements of active labour market policy are run by the
UNEDIC (Union nationale inter-professionnelle pour l'emploi dans l'industrie et le commerce).
Compulsory basic insurance is provided by three general regimes and 28 special firm- or sector-specific
regimes, the most important of which are those covering the public sector and many state-owned firms.
1
Most of the special schemes deal only with retirement income, although four also cover healthcare. Three
broadly based and widely subscribed regimes are:
CNAVTS (Caisse nationale d'assurance vieillesse des travailleurs salariés) administers the mandatory
pension contributions of most dependent employees and manages the old age targeted social assistance
programmes.
CNAMTS (Caisse nationale d'assurance maladie des travailleurs salariés) administers health, maternity,
invalidity, professional sicknesses, death and on the job accidents insurance for broadly the same
categories of employees. Moreover, it co-ordinates the medical verification system and participates in the
organisation of health prevention campaigns.
CNAF (Caisse nationale des allocations familiales) is responsible for the administration of most social
assistance programmes, including: housing benefits, anti poverty programmes, such as the guaranteed
minimum revenue (Revenu minimum d'insertion, RMI).
Of these only CNAF provides universal coverage. The CNAMTS covers about 84 per cent of individuals,
while the general pension scheme covers less than half of pension benefits.
In addition there are so-called complementary old-age regimes, which are organised along professional
2
lines (clerks, managers, for example). Despite their name, these regimes are compulsory. Unlike the
general regime they are not subject to relatively low contribution and benefit ceilings, thereby allowing
combined pensions to achieve significant levels.
Although contributions are collected locally, all collected revenues are integrated in a special account at
the Central Fund for Social Security (Agence centrale des organismes de sécurité sociale, ACOSS), which
provides the treasury services across-schemes and distributes resources.
Interactions between social security and the State
The regimes’ administrative autonomy from the State varies widely. The three nation-wide regimes are
state entities (Établissements publics). Thus while they are outside the State administration, their
supervisory board is appointed by the government, as are several members of their administrative boards
(the others being appointed by representatives from the trade unions and the employers associations).
Similarly, the special public-sector regimes (including those of several state-owned enterprises) are under
the direct responsibility of the state and their accounts are integrated in the State Budget, or directly into
the firms’ balance sheets. The employers’ and complementary regimes operate under private-sector law
and enjoy more autonomy.
_____________
1. The special regimes for agents of SNCF and RATP cover both risks, while the Fonctionnaires de l'État
contribute to the general regime for healthcare and to their own pension regime.
2. Five of the 28 special regimes manage both the basic and the complementary component of their
subscribers’ pensions.
97
161.
The PLFSS is elaborated by the Ministry of Health in close cooperation with the Ministry of
Finance before being decreed by the Cabinet. In contrast to the State Budget, it has no associated balance
because the range of expenditure programmes (obligatory schemes with more than 20 000 subscriptors)
and revenues (all of the regimes and organisms that contribute to their financing) are not identical. The
budgets allocated to the pension regimes and, to a lesser extent, the social assistance regimes pose
relatively few technical challenges. The parameters that determine their revenues (contribution rates,
earmarked revenues, transfers from the State Budget) and their expenditures (benefit rates, eligibility rules)
are determined by the government. As a result, the authorities have in their hands not only the tools
necessary to predict both expenditures and revenues, but also the ability to adjust parameters so as to
ensure financial sustainability. The Healthcare budget is more complicated (see OECD, 2000 for a fuller
discussion of the French health care system). Although tariffs and unit costs are also defined by the
government, the quantities supplied, and therefore overall costs, are largely unconstrained. Parliament
seeks to exercise some influence by establishing a national health spending target (Objectif national des
dépenses d'assurance-maladie, ONDAM), within the PLFSS. With the exception of the hospital sector,
where the government has the ability to impose a binding budget constraint, the ONDAM is not a cap on
reimbursements. For the ambulatory care (private fees, prescriptions, per diem sickness benefits) and
medical-social sectors (the elderly, maladjusted children, handicapped adults) the ONDAM specifies
spending targets that are consistent with financial stability and defines policy priorities. A combination of
the non-binding nature of the ONDAM and unrealistic targets has, over the years, resulted in actual
outturns systematically exceeding the ONDAM by large margins.
162.
The budget of the UNEDIC, the umbrella agency responsible for unemployment insurance, is
not covered by the PLFSS. The UNEDIC operates as a delegated public service and has much more
autonomy than the other social security agencies in determining both contribution rates and benefits that it
pays. Union and business representatives, who are equally represented on its board (organisational
representations were last fixed in the mid 1980s), meet biannually to agree proposals on these rates. The
board’s propositions are then presented to the government, which, if it agrees, passes a decree giving them
the force of law. While not a voting member of the UNEDIC, the necessity of having its agreement to any
accord means that generally the government’s voice is heard in discussions and only rarely has the
government imposed an agreement on the social partners. Moreover, the UNEDIC provides additional
services for the State, such as extended unemployment insurance benefits to the long-term unemployed,
reimbursed by the State Budget.
163.
The financial relationship between the State Budget and the social security funds is complex.
Approximately two-thirds of social security funding comes from social security contributions levied on
payrolls60 and one-sixth comes from a special income tax61 (Contribution sociale généralisée, CSG) that is
levied on a wider base including income from capital. In 2001, indirect and direct State Budget transfers to
the social security system represented about 125 billion euros or more than 8 per cent of GDP, not
including the 25 billion euros spent on public servant pensions, which do not pass through the social
security regimes. Of this amount, the State Budget makes a direct contribution of 35 billion euros (2.4 per
cent of GDP): 10 billion euros to the various organisms of the social security system; 21 billion euros to
compensate the social security schemes for programmes that they administer for the State; and 4 billion in
direct subsides to compensate for the deficits of the regimes of various state owned enterprises (Box 9).
The remaining 90 billion euros (6 per cent of GDP) are distributed in the form of earmarked revenues from
a wide range of sources including the CSG, excise taxes and duties (levied on products such as tobacco,
alcohol and gasoline). Two thirds of this goes directly to the social security regimes and 1/3 goes to the
special funding schemes. Of this last third, about half is paid to reimburse the social security regimes for
the reduced revenues from special payroll tax reductions instituted in effort to reduce the cost of low-paid
labour and to offset costs associated with the 35 hour workweek. Finally, substantial additional money is
98
channelled to and between the social security funds through various special vehicles. In 2002, the total of
these transfers and additional revenues from the special funding schemes amounted to 44 billion euros
(about 2½ per cent of GDP).
Box 9. Special social security financing funds
The accumulated deficits of some social security funds, and government programmes promoting various
policy objectives affect the overall balance of the social security funds. In response, the authorities have
created a variety of special funds, whose revenues are assured by the General Social Security
Contribution (Contribution sociale généralisée, CSG), excise taxes and privatisation revenues to
supplement the earmarked revenues of the social security system. Some of the most important of these
are the following:
- The old age solidarity fund (Fonds de solidarité vieillesse, FSV) was created in 1993 and is financed by
the overall budget of the family assistance regime and certain taxes, notably a 2 per cent surcharge on
capital revenues (part of the base for the CSG) and the surplus of the social solidarity contribution paid out
by firms (Contribution sociale de solidarité des sociétés). It funds assistance-related aspects of old age
expenditure, like the minimum pension (minimum vieillesse) and other special old age benefits. As of 1996,
the fund for the amortisation of the social debt (Caisse d'amortissement de la dette sociale, CADES) has
taken on some of these activities.
1
- The Retirement Reserve Fund (Fonds de réserve pour les retraites, FRR) was created in 1999 is
supposed to be funded from privatisation revenues and the same taxes and surpluses that finance the
FSV. It is hoped that by 2020 it will accumulate some 153 billion euros (10 per cent of GDP in 2002) which
can then be gradually disbursed in order to smooth the pension-related costs from the ageing of the
population (see OECD, 2001).
- The Fund to Finance the Reform of Enterprises’ Social Charges (Fonds de financement de la réforme
des cotisations patronales de sécurite sociale, FOREC), was created in 2000 as a means to offset the
revenue losses incurred by various regimes due to the reductions in social charges associated with the
35 hours legislation.
- In addition, there are several smaller special funds, namely the Fund for the financing of special
assistance allowances to the elderly (Fonds des financement de l'allocation personnalisée d'autonomie,
Fonds APA), the Solidarity Fund (Fonds de solidarité), the Asbestos- workers early retirement Fund (Fonds
de cessation anticipée d'activités des travailleurs de l'amiante, FCAATA) and the agriculture work accident
fund (Fonds commun des accidents du travail agricole, FCATA).
___________
1.
Enabling legislation was passed in 1999 but the directive actually creating the fund was not issued until 2001.
164.
Both the collection of revenues and distribution of benefits of the various social security funds is
coordinated by a Public Enterprise, the Central Agency of the social security schemes (Agence centrale des
organismes de sécurité sociale, ACOSS). Since 1996, the ACOSS operates as an independent agency
under contract to the State, with specific objectives and mutual obligations specified in a contract
(convention), the most recent of which is to run for the period 2002-2005. The ACOSS in turn signs similar
contracts with the 100 plus regional agencies responsible for collecting social security contributions
(known collectively as URSAFF, Union de recouvrement des cotisations de sécurité sociale et
d'allocations familiales) and the 37 funds charged with distributing benefits. The ACOSS manages its own
treasury function, although this is monitored on a monthly basis by the Treasury Department of the
Ministry of Finance. Overruns are financed by loans from the state-owned "Caisse des dépôts". In contrast
to the other social security schemes, the UNEDIC maintains its own parallel collection and benefit
99
distribution system. It performs its own treasury function and relies on the private banking sector for cash
management and borrowing operations alike, but as a special entity recognised as “pursuing a mission of
general interest”, its liabilities are guaranteed by the state, which on several occasions has been called upon
to cover its accumulated debts.
165.
Ex post auditing of the social security regimes is provided by the National Auditor (Cour des
Comptes), which issues regular reports on the legal execution of the budgets of the social security, but also
provides more analytical reports on the efficiency with which their expenditures were made, an activity
that is consuming an increasing share of its energies. Moreover, the regimes are subject to constant
oversight from the Ministries of Health; Family and Social Affairs; and Finance. Day-to-day operations are
supervised by the social affairs general inspectorate (Inspection générale des affaires sociales). Finally an
end of year report (loi de règlement) outlining the out turn of the previous year’s social security budget is
reported to parliament prior to the presentation of the budget for the coming year.
Policies to strengthen public expenditure management
166.
Given the strong financial pressures facing public expenditure in the medium to long term, the
authorities' capacity to direct, successfully plan, and implement a medium-term spending strategy will be
of increasing importance. Moreover, the tools available to public officials to help them arbitrate between
competing demands will be crucial. While steps are already being taken to strengthen structures in both of
these areas, more can be done. The following paragraphs seek to identify the directions for reform
susceptible to improve policy makers’ ability to exercise fiscal control effectively, while at the same time
continuing to offer an appropriate range of services to their citizens in a cost-effective way.
Improving the authorities’ control over expenditure
167.
The problems posed by increasing spending pressures as the population ages and the economic
and social costs of higher taxes are well known and have been the focus of policy reforms throughout the
OECD over the past two decades. As Chapter I highlighted, for France these pressures suggest that in the
absence of reform total spending is likely to rise by as much as 8 per cent of GDP (19 per cent if the debt is
allowed to accumulate) over the next 50 years, with significant increases beginning in the next decade.
Unlike many of its economic partners France has made relatively little progress in preparing the fiscal
room to meet these pressures (Table 17). Thus while other OECD countries have reduced the share of
public expenditure in GDP by one percentage point since 1990, spending in France actually increased by
3 percentage points. More recently, France has reduced spending by 1.1 per cent of GDP since 1995, but
this mainly reflects cyclical factors and pales in comparison with the progress made in other OECD
countries. Countries such as Sweden, Finland and Canada have been able to cut spending by as much as
10 per cent of GDP, while other European countries such as Belgium, the United Kingdom, the
Netherlands, Norway, Denmark, Italy and Austria have made two to three times as much progress as
France.
100
Source: OECD.
Sweden
Finland
Canada
Ireland
Austria
Hungary
Italy
Denmark
Norway
Netherlands
Poland
United Kingdom
Belgium
New Zealand
Greece
Australia
France
United States
Germany
Island
Mexico
Luxembourg
Switzerland
Portugal
Japan
Korea
59.0
49.0
48.8
43.2
53.1
47.3
54.4
57.0
45.4
54.8
52.5
42.2
52.3
45.5
50.3
35.4
50.7
36.5
44.5
42.5
17.3
43.3
30.5
42.9
32.1
19.5
1990
(1)
(10)
(11)
(17)
(5)
(12)
(4)
(2)
(14)
(3)
(6)
(20)
(7)
(13)
(9)
(22)
(8)
(21)
(15)
(19)
(26)
(16)
(24)
(18)
(23)
(25)
67.3
59.6
48.5
41.5
57.3
56.9
53.4
60.3
50.6
51.4
47.2
44.6
51.7
38.4
50.5
38.8
55.2
36.4
49.4
43.8
18.2
45.1
34.7
45.0
36.1
20.6
1995
(1)
(3)
(13)
(19)
(4)
(5)
(7)
(2)
(10)
(9)
(14)
(17)
(8)
(21)
(11)
(20)
(6)
(22)
(12)
(18)
(26)
(15)
(24)
(16)
(23)
(25)
57.0
48.6
41.2
31.9
52.5
44.6
46.9
54.8
43.6
45.3
40.7
37.0
48.4
37.4
50.1
36.0
52.7
33.6
45.9
43.1
18.0
39.8
33.4
45.3
38.6
24.3
2000
2001
101
Per cent of GDP (rank)
(1)
56.7
(6)
48.9
(15)
41.7
(24)
33.6
(4)
52.3
(12)
46.7
(8)
48.4
(2)
55.3
(13)
44.6
(10)
46.4
(16)
42.4
(20)
40.5
(7)
48.3
(19)
36.3
(5)
48.5
(21)
36.7
(3)
52.7
(22)
34.9
(9)
48.3
(14)
43.4
(26)
18.2
(17)
40.4
(23)
34.2
(11)
46.3
(18)
38.0
(25)
24.8
Share of Public expenditure in GDP
Table 17. Fiscal consolidation in the OECD
57.2
49.7
40.9
34.4
52.1
51.8
48.4
55.3
46.0
47.3
43.2
41.4
48.6
35.7
48.0
36.4
53.8
35.5
48.6
43.6
17.9
44.9
35.4
46.3
38.6
24.6
2002
(1)
(6)
(18)
(24)
(4)
(5)
(9)
(2)
(13)
(11)
(16)
(17)
(7)
(21)
(10)
(20)
(3)
(22)
(8)
(15)
(26)
(14)
(23)
(12)
(19)
(25)
-1.8
0.8
-7.9
-8.8
-0.9
4.5
-6.0
-1.7
0.7
-7.5
-9.3
-0.9
-3.7
-9.8
-2.4
1.0
3.1
-1.0
4.1
1.0
0.7
1.6
5.0
3.4
6.5
5.2
2002-1990
-10.1
-9.8
-7.6
-7.1
-5.2
-5.1
-5.0
-5.0
-4.6
-4.1
-4.0
-3.2
-3.1
-2.7
-2.6
-2.4
-1.4
-0.9
-0.8
-0.3
-0.3
-0.2
0.8
1.3
2.5
4.0
2002-1995
Change
168.
The repeated failure of the authorities to meet their medium-term spending objectives and the
long-term ratcheting up of government expenditure reinforce the need to improve the capacity of decision
makers to control public spending. With the exception of 2002, the authorities were able to respect their
goals at the level of the State Budget. But constant and significant expenditure overruns in the social
security account (mainly healthcare) meant that rather than the Budget balance predicted in the 1999
multiyear plan, the authorities now expect the deficit for 2003 to come in at 3.4 per cent of GDP, a full
percentage point higher than the level observed before this process of fiscal consolidation began.62 While
cyclical and electoral factors appear to have influenced the most recent slippage, its extent and the
similarity to previous episodes where expenditures reached new levels during economic downturns are
disturbing (see Figure 23).
Figure 23. Slippage in multiyear targets
Per cent of GDP
55
55
General government expenditures
History
2001-2003
2002-2004
2003-2005
2004-2006
54
53
52
54
53
52
51
51
50
50
49
1999
2000
2001
2002
2003
2004
2005
2006
2007
53.0
52.5
49
53.0
Total revenues
History
2001-2003
2002-2004
2003-2005
2004-2006
52.0
51.5
52.5
52.0
51.5
51.0
51.0
50.5
50.5
50.0
50.0
49.5
1999
2000
2001
2002
2003
2004
2005
2006
2007
47
47
Fiscal revenues
History
2000-2002
2001-2003
2002-2004
2003-2005
2004-2006
46
45
44
43
0
46
45
44
1999
2000
2001
2002
2003
2004
2005
2006
2007
Net lending
43
0
-1
-1
History
2000-2002
2001-2003
2002-2004
2003-2005
2004-2006
-2
-3
-4
49.5
1999
2000
2001
2002
2003
2004
Source: Various issues of Projet de loi de finances; INSEE and OECD.
102
2005
2006
2007
-2
-3
-4
169.
In many respects, the system of managing expenditures in the State Budget is of the highest
quality. Stringent controls both ex post and ex ante help ensure that public funds are spent only as
authorised, while the central treasury function means that the authorities have a strong sense of fiscal
developments, allowing them to employ their significant discretionary powers to counteract any apparent
slippage in the State Budget. However, the State Budget represents only 35 per cent of total spending, and
even if it cut its activities by 50 per cent, these savings would not be sufficient to compensate for rising
pension and health costs.63 As a consequence, rigour in the State Budget needs to be accompanied by
slower growth in social security expenditures and improved mechanisms for reflecting national spending
objectives at the sub-national level. At the level of social security, less comprehensive controls and
oversight over mandatory spending, plus the large number of overlapping responsibilities, complicate the
task. At the sub-national level, tight budgetary rules limit deficits. Moreover, their track-record in
delivering programmes in a cost-efficient manner is perceived to be better than of the central government.
However, there are no mechanisms for co-ordinating spending levels at the sub-national level. Thus, as
more of public expenditure is transferred to this level, it will become increasingly difficult for central
authorities to direct overall general government spending both for short-term fiscal policy reasons and so
as to meet longer term strategic objectives. Therefore, in concert with steps to raise the spending authority
of sub-national levels of government, it will become increasingly necessary to introduce mechanisms that
guarantee that they play a part in the overall effort of expenditure control.
170.
The case of the social security regimes is even more complicated because while the State
exercises considerable control over the parameters of the various systems and covers their revenue
shortfalls, the administration of each (and some cost levers) are in the hands of the social partners. With the
possible exception of the UNEDIC, neither the government nor the social partners have the exclusive
means to control expenditures (or revenues). This lack of symmetry between responsibilities and authority
to act, coupled with the mandatory and politically sensitive nature of these expenditures, is a recurring
source of conflict between the government and the social partners -- one which has contributed to the lack
of progress in reforms. Indeed, on several occasions, efforts of each to control costs have been frustrated
by the other.
171.
There is no simple solution to this asymmetry. The reforms outlined below should improve the
system's capacity to contain cost pressures. It privileges mechanisms that might improve the ability of the
Parliament and the government to manage expenditure, not because they have done or are necessarily
likely to do a better job than the social partners, but because, as the elected representatives of the whole
population, they bear ultimate responsibility for the public debt and the performance of the economy.
Exercising better control over the expenditure path
172.
If policy makers are to assert control over public expenditures, they need to be confronted with
accurate and comprehensive information about budgetary developments, both in the current year but also
for the future. For the moment, the strictly annual nature of the State and social security budgets prevents
decision makers from having a clear vision of the longer-term implications of policy decisions. This
increases the risk of passing legislation whose in-year costs may not be that large, but which have longterm implications on spending. Indeed, the ratcheting up of public spending over the past thirty years
suggests that there has been a marked tendency to increase spending in a permanent manner during cyclical
peaks (Figure 24), with the result that during downturns the ratio of public expenditures to GDP has risen.
173.
In order to improve the information available to policymakers and to combat tendencies to raise
the level of expenditures permanently during revenue-rich periods of the cycle, new spending and revenue
measures should systematically include evaluations of their medium-term impacts on the general
government budget. In order to ensure consistency, these should be based upon centrally defined
macroeconomic assumptions, and the technical assumptions that underlie these evaluations should be
103
submitted to a central agency for review. Currently, such evaluations are done by the Ministry of Finance
for large programmes, but not for smaller ones and, even with larger ones, these analyses are not integrated
into the budgetary process. Of course, for such a system to be effective it is critical that macroeconomic
and revenue assumptions be prudent, which has arguably not been the case in the past. Indeed, the deficit
reduction plans of the French authorities in 2001 and 2002 were predicated on the economy growing at
3 per cent, substantially higher than its potential rate of growth and, in the event, much faster than actual
growth. A superior solution would be to base medium-term projections on assumptions of GDP growth
more in line with the economy's potential. In this respect, the 2.5 per cent growth assumption in 2002 was
more realistic, even if substantially higher than most estimates of potential growth, which tend towards 2.1
and 2.2 per cent.64 Moreover, the ONDAM would need to be set at a more realistic rate. If healthcare
reforms (see below) do not succeed in generating sufficient savings a high but realistic ONDAM will help
impress on policy makers the need to generate savings elsewhere. Finally, given that the longer-term
sustainability of public expenditures in France has yet to be assured (see Chapter I), any revenue windfalls,
deriving from better than expected macroeconomic performance or privatisation should be immediately
assigned to paying down the debt.
Figure 24. Asymmetric response of expenditures to the economic cycle
Per cent of GDP
Cyclical peaks
Cyclical troughs
45
Total expenditure (left scale)
Primary expenditure (left scale)
Total expenditure less social security (right scale)
55
40
50
35
45
30
40
1970
1975
1980
1985
1990
1995
2000
25
.
174.
While such a setup would help impress upon decision-makers the longer-term fiscal
consequences of new policy initiatives, the authorities' capacity to engineer a reallocation of resources and
perhaps a reduction in overall spending levels would be enhanced further if the State and Social security
budgets were more clearly integrated into a medium-term framework. Significant progress towards
integrating multiyear forecasts into the parliamentary debate have been made. In particular, the budget
orientation debate, the inclusion of the multiyear plan into the budget documentation and reports on the
evolution of tax revenues all go in this direction. However, these projections remain an annex that is
presented to parliament as a programme of the executive. In order to consolidate recent progress and so as
to increase the visibility of the medium-term consequences of various decisions, these projections should
be integrated into the budgetary procedure, discussed, debated and approved by parliament. Moreover,
because information on individual Budget and social security programmes or "missions" is not included, it
is not possible to isolate the influence of different spending initiatives in out years, nor the basis for the
104
fiscal consolidation that is asserted (a factor, which along with unrealistic assumptions helps explain the
failure of these goals to be achieved).
175.
Given the major changes in budget procedure already implied by the introduction of the LOLF
(see below), it is probably inopportune to move towards a true medium-term expenditure framework at this
time. One solution might involve maintaining the separation of the State Budget and the Social Security
Funds and their single year focus, but presenting and anchoring them within a more detailed and rigorous
medium-term projection. This enhanced medium-term projection could serve as an umbrella for the two
single-year budgets but also extend them several years into the future, based on common macro
assumptions and unchanged policies (or on explicit indications of where savings would be generated to
meet medium-term goals).
176.
As compared with current practice, this would imply including more detail into the multiyear
plan concerning spending missions and the activities of the social security funds. The outyear budgetary
projection, after adjustment for changes in macroeconomic developments, could then be used as the basis
for the following year's budgets. This would help reinforce the virtuous circle created by the existing
examination of the past year's outturn, by increasing its scope to the whole of the general government and
by linking it more directly to the discussions of the next year's budget.
177.
Bringing forward the preparation of local government budgets would also help. In so far as their
activities represent 19 per cent of GDP, the ability of central-government decision makers to plot both
short-term and medium-term fiscal policy at the general government level would benefit from more timely
contributions from the local level. Moreover, given that revenue estimates are decided well in advance of
the actual voting of the Budget, there is no apparent technical impediment for local governments to provide
provisional budgets in time for the parliamentary debate and to finalising them much more quickly after
passage of the State Budget. To help ensure that expenditure savings at the central level are not undone at
the subnational level, the authorities might wish to introduce mechanisms that ensure subnational
governments take responsibility for the macroeconomic consequences of their actions. Here, departmental
and regional spending norms analogous to those at the national level or other mechanisms that would
guarantee that subnational levels play a part in overall efforts to control spending might be envisioned.
178.
Such solutions have several advantages:
1.
They would not require any fundamental legal changes;
2.
They would further reinforce the notion of the general government and the inter-relationships
between social security and other forms of public expenditure;
3.
Unchanged policy projections would make explicit the savings or revenue shortfalls that
would be required to meet medium-term spending objectives;
4.
The use of the previous year's projection as a starting point for the following years' budgets,
would enhance transparency;
5.
Prudent assumptions for future developments would help prevent windfall revenue increases
from being transformed into permanent increases in spending commitments.65
Controlling mandatory expenditures
179.
Mandatory expenditures (health, unemployment insurance, pensions and social assistance)
represent more than 40 per cent of general government spending and are its fastest growing component. As
such, the ability of the authorities to control these expenditures (principally social security spending) will
105
determine crucially their success in containing overall cost pressures. The increased prominence of social
spending in overall public expenditure,66 which has been observed in virtually all OECD countries, reflects
three main factors: a substantial widening of the roles undertaken by the general government;67 the
mechanical impact of ageing on health, pension and family assistance expenditures (the only factor taken
into account in the projections of Chapter I); and technological and demand-side changes associated with
rising incomes, which have weighed heavily on the rate of increase of healthcare costs.
Pension reform
180.
The simulations in Chapter I illustrate the substantial additional fiscal pressures that the ageing of
French society is likely to entail and the risks they pose to fiscal equilibrium. The current pension reform
initiative is a first step towards meeting these pressures. However, even at their most ambitious, current
proposals only seek to address somewhat more than one-third of the system's underfunding. In particular,
the remainder of the financing as concerns the private sector is achieved at a constant overall tax burden by
assuming substantial reductions in unemployment insurance expenditures. Thus, whatever shape this
reform eventually takes it will need to be extended. While decisions as to the precise nature of any final
reform are the responsibility of the French authorities, international experience and the nature of the
current system suggest some courses of action over others that would generate savings while respecting
social and equity concerns.
-
Raising social contributions yet further seems a particularly unattractive option, given the already
high tax burden and the considerable economic inefficiencies that would likely be generated by
the 10 percentage point hike estimated necessary by the government's Retirement orientation
council (Conseil d'orientation des retraites, COR).
-
There is likely scope for reducing replacement rates without endangering the income adequacy of
the elderly. Indeed, the average revenue of a retired person in France is higher than the rest of the
population (see Box 10).
-
Increasing contribution periods, as proposed by the authorities, in line with improving longevity
also seem reasonable. At a minimum these should be increased in an actuarially neutral manner,
although given the overall disequilibrium of the system and the substantial improvements in life
expectancies already achieved a non-neutral increase might also be merited.
-
Augmenting individuals’ freedom to decide when to retire by stopping the subsidisation of early
retirement and by permitting early withdrawal with actuarially reduced benefits would be helpful,
especially if combined with the ability to continue working while increasing pension rights or to
work and simultaneously draw a pension (see below).
The system should be made more equitable by:
−
treating pensions and earnings in a more actuarially neutral manner (Guegano, 2000
calculates that 9 per cent per year (de) increment to a pension per year of contributions would
be actuarially neutral at age 62);68
−
eliminating subsidised early-retirement programmes;
−
reducing the inequalities in the treatment of public-sector and private sector workers.
106
Box 10. Incomes of the elderly
In France, the disposable income of individuals over 65 is 90 per cent of those of working-age (Förster and
Pellizari, 2000), making French retirees the fourth richest in the OECD. Moreover, if an imputation is made
for owner-occupied housing, they actually have higher incomes than working-age people (see Table 18).
While the overall pension scheme contributes significantly to this result, it reflects to a large extent the
substantial wealth accumulated in non-pension private-sector savings schemes such as those operated by
1
the insurance sector. These resemble defined-contribution private-sector pension schemes seen in other
OECD countries and benefit from similarly favourable tax treatment. In recent years, there has also been
increased take up in two new voluntary saving schemes (plans d’épargne entreprise — PEE and plans
partenariaux d’épargne salariale volontaire — PPES). These receive very favourable tax treatment;
contributions are exempt from both income tax and social charges, while benefits are only subject to a
10 per cent tax rate.
Finally, while 10 per cent of the elderly have less than half the disposable income of an average person,
minimum pensions and additional dependency allowances have virtually eliminated absolute poverty
among the elderly.
_______________________
1. All told, individuals over 50 hold about three quarters of these assets, which combined with other
financial assets are worth 3.7 times household disposable income (a higher ratio than in Spain, Germany
and Italy).
181.
As concerns this last point, the differences between public- and private-sector regimes are
substantial and exist along virtually every dimension of the two systems, working almost universally in the
favour of public servants (Box 11). In part, the existing differences reflect steps taken in 1993 to improve
the sustainability of the private-sector system and the failure to implement similar reforms in 1995 for the
public-sector regimes. Overall the favourable treatment of the public sector regimes is reflected in the fact
that although their adherents represent only 25 per cent of workers, the projected deficit of their regimes is
expected to be about the same size as that of the private-sector regimes, implying that the per capita
contingent liability of the public sector scheme is three times that of the private sector one (Table 19).
Indeed, the present value of current government liabilities to civil servants, at between 600 billion euros to
800 billion euros, is more than the outstanding gross public debt (Marini, 2002). Harmonising the two
systems, by bringing the public-sector scheme into line with the private sector could be expected to
eliminate 1/3 of the total expected shortfall.
107
1.2
Hungary
Iceland
Ireland
Italy
Japan
3.0
8.43
23.1
11.6
20.3
11.3
3
19.1
8.43
92.7
77.8
91.7
89.2
74.1
85.3
86.3
74.6
84.1
16.7
15.3
6.73
32.9
1.9
85.2
73.0
79.0
89.7
85.6
76.8
67.6
86.6
77.9
97.4
6.0
9.2
7.5
10.7
10.4
29.2
16.1
14.9
13.8
2.5
..
97.34
..
84.1
74.4
2.3
7.4
..
11.4
3.2
..
2.4
119.3
..
2.2
86.0
57.8
3.0
18.7
24.4
10.7
6.3
3.2
4.6
63.8
3.6
6.1
45.7
3.8
Per cent of
GDP
Private pension
funds 1999
62.0
65.1
63.3
61.2
64.2
61.8
61.1
66.5
65.3
61.1
64.7
60.1
67.5
58.4
66.0
64.2
61.6
67.1
59.3
69.1
61.5
60.0
59.8
60.8
62.2
61.1
62.6
62.4
59.8
59.3
60.5
61.7
61.3
Female
59.7
Male
Age of withdrawal,
1994-1999
9.4
11.4
18.1
4.8
13.1
13.2
7.5
19.0
1.1
1.6
29.6
0.0
30.5
3.1
8.6
3.1
19.9
7.9
3.4
21.8
4.6
3.7
1.2
3.0
5.0
6.0
2.81
1.3
6.0
4.0
Aged over 65
73.5
82.4
50.8
64.4
68.1
73.6
41.5
63.7
43.0
61.4
71.3
38.1
80.5
52.0
74.6
36.3
92.8
66.1
57.8
83.4
65.5
51.2
43.8
50.6
57.0
60.0
42.11
36.6
61.3
55.0
Male
108
67.4
56.1
18.4
44.6
53.0
63.2
24.1
41.9
11.2
23.6
47.9
14.3
27.6
26.9
51.7
15.4
81.7
29.5
26.6
49.2
51.8
49.5
34.1
32.4
23.6
36.9
17.51
15.7
41.7
24.5
Female
Aged 55-64
Participation rate, 2001, per cent
Förster and Pellizzari (2000).
Secretariat estimate in OECD (2001). Official reports suggest a 4.4 per cent increase on unchanged labour market policies for the period 2000=2040 (COR, 2001).
Smeeding (2002).
1998
-0.7
1.8
1.6
8.0
8.0
-2.5
4.8
5.7
8.0
Relative
disposable
income of the
elderly1
Per cent of the
elderly with income Per cent of the
disposable
less than 50 per
income of all
cent of median
individuals
disposable income
Low income
rate of the
elderly1
Source: Förster and Pellizzari (2000); Jesuit and Smeeding (2002), Luxembourg Income Study; OECD Labour Force Statistics, Scherer (2002).
1.
2.
3.
4.
Sweden
Switzerland
Turkey
United Kingdom
United States
Norway
Poland
Portugal
Slovak Republic
Spain
Korea
Luxembourg
Mexico
Netherlands
New Zealand
2.7
4.8
3.92
5.0
Denmark
Finland
France
Germany
Greece
-0.3
0.6
1.6
2.2
3.3
5.8
6.8
Australia
Austria
Belgium
Canada
Czech Republic
Change in per
cent of GDP
2000-2050
Projected
increases in old
age pension
spending
Table 18. Performance indicators: sustainable retirement income
Box 11. Main difference between public- and private-sector pension schemes
1. Contribution periods: In general public servants must work only 37.5 years before qualifying for a full
pension, in contrast to 40 years in the private sector. Moreover, many public servants and employees of
State-owned enterprises benefit from special regimes which allow them to leave at 55 or even 50 years of
age. Mothers of three or more children can retire after only 15 years of service, with no reduction in
benefits to reflect the long period they will be collected. In contrast, private-sector workers must work until
60 and do not qualify for a full pension until they have worked 40 years.
2. Contribution rate: Public sector employees contribute only 7.85 versus 10.3 per cent in the private
sector.
3. Calculation of benefit: Private-sector workers benefits are based on the average of 25 years of
inflation (not wage) adjusted salary. Public-sector workers pensions are based on the salary excluding
bonuses, which are not subject to charges) earned in their last 6 months of work. Moreover a significant
percentage of public servants receive substantial promotions just prior to their retirement – effectively
substantially increasing their replacement rate.
4. Replacement rate: While the pension an individual receives does depend on his or her contributions,
both system are highly redistributive. Thus, in the private sector system overall replacement rates in the
private sector vary from 54 per cent for managers that received many promotions to 87 per cent for blue
collar workers. In the public sector they vary less, ranging from 60 to 78 per cent depending on how much
of an individual's income comes from bonuses and excluding the effect of end career promotions.
Moreover, the degree of inequality is projected to increase as private-sector replacement rates are
projected to fall by between 9 and 17 percentage points by 2040, reflecting the impact of the 1993 reform
1
of the private-sector scheme.
5. Indexation: civil servants’ pensions are indexed to public-sector wages, whereas those fo the privatesector are adjusted according to price inflation.
____________________
1. In addition to increasing working requirements from 37½ to 40 years, the reference period for
determining benefit rights was extended from 10 to 25 years and inflation replaced wage growth as the
mechanism for indexing earlier salaries in the calculation.
182.
The pension reform bill that was presented to Parliament in June 2003 proposes a number of
changes aimed at reducing some of these inequalities. In particular, it proposes raising the public-sector
normal-contribution period to 40 years (see Chapter I). These are steps in the right direction, but will only
begin to deal with the discrepancies between the two systems. In particular, they leave untouched the
various special regimes allowing for very early retirement within the public-sector regime per se and those
operated by state-owned enterprises. Moreover, the reform does not deal with the abusive practice of
giving public servants substantial promotions just before their retirement, nor does it deal with the
fundamental inequity that replacement rates in private-sector pensions, which are already lower than those
in the public sector, will be falling by between 9 and 17 percentage points over the next several decades (as
the impact of the 1993 reform comes on line), while those in the public-sector will not if the individuals
concerned continue working so as to receive a full pension.
109
Table 19. Official estimates of pension fund balances
Number
of
workers
Million
Pension
expenditure
€ billion
1998
Pension fund balances
% GDP
2000
1
% GDP
2000
2005
2010
2020
2040
Base case
Private-sector employees
2
Government employees
3
Public enterprise employees
4
Self-employed
5
Farmers
Others
14.2
4.4
0.4
0.9
1.4
1.8
95.5
37.5
7.7
2.6
12.0
9.5
6.7
2.6
0.5
0.2
0.8
0.7
0.4
0.2
-0.2
0.0
-0.6
-0.4
0.7
-0.1
-0.2
0.0
-0.5
-0.6
0.5
-0.5
-0.2
0.0
-0.9
-1.0
-0.6
-1.3
-0.2
0.0
-1.3
-1.8
-1.9
-2.0
-0.2
-0.1
-2.0
-2.5
All covered workers
23.7
164.8
11.6
-0.6
-0.5
-1.0
-2.8
-4.7
9.7
3.0
7.5
3.0
4.5
1.5
4.5
1.4
4.5
-0.6
-0.9
-1.9
-3.9
-5.9
9.7
9.0
9.0
9.0
9.0
Base case assumptions
6
Economic growth
Unemployment rate
7
Alternative scenario
All covered workers
Alternative assumptions
8
Unemployment rate
1.
2.
3.
4.
5.
6.
7.
8.
Contributions minus pension spending. A positive value shows a surplus. As regards civil servants, employers contributions
reflect actual receipts for local government employees. For central government employees whose pensions are paid from the
budget, the fictive rate of employers contribution that balances contributions and pensions in 2000 is kept constant onwards to
run the simulations reported here.
Including government employees on private law contracts.
Namely SNCF, EDF, GDF and RATP. The method of the fictive rate (see above) is also used here for determining employers
contributions.
Excluding self-employed farmers.
Including farm employees.
OECD estimate of potential economic growth to 2005 is 2 per cent.
The alternative scenario has been extrapolated from the sensitivity analyses given in COR (2001).
OECD estimate of the structural unemployment rate in 2005 is 9 per cent.
Source:
OECD computations on the basis of COR (2001) for financial projections. Charpin (1998) for number of employees apart
from the item "others" which is a Secretariat estimate.
Healthcare
183.
Given the demand-driven nature of costs in the Healthcare system, slowing the speed at which
expenditures rise will be more complicated, as indeed it is in all OECD countries (Docteur and Oxley,
2003). Several recent and planned initiatives should serve to slow the pace of health insurance costs. In this
regard, recent reforms to increase the use of generic drugs and to ease or lower the rate of subsidisation of
drugs of questionable medical efficiency are positive steps, which can, by lowering the level of spending in
a given year, slow the overall progression of costs. Similarly, proposals to reduce the extent of the
coverage of the compulsory healthcare system but simultaneously extending universal coverage to more
individuals, while augmenting the share covered by voluntary complementary insurance schemes and
allowing them to determine reimbursement rates for non-essential medical services, would also help if
implemented (Chadelat, 2003). Such a reform would tend to raise awareness among healthcare demanders
of the costs of various options -- and in so doing reduce the rate of growth of healthcare costs -- while at
110
the same time ensuring that all continue to have access to a high level of care. By the same token, it will be
necessary to make the ONDAM more binding. The government would also like to produce a report on the
medicalisation of the ONDAM in order to be able to forecast its evolution on medical grounds. Such an
initiative, if put in place, would have the further advantage of emphasising objectives as opposed to inputs
when planning for healthcare. Additional measures that might be considered, which could improve the
authorities leverage over the rate of growth of expenditures were outlined in the special chapter on the
health care system included in the 2000 Economic Survey. These included:
•
The introduction of diagnosis-related payments for hospital-based care. This has entered on
experimented phase and once generalised it should increase incentives to reduce administrative,
medical and pharmaceutical costs.69
•
Expand the role of the regional hospital agencies (Agences régionales d’hospitalisation, ARH) so
that they can operate as care purchasers, which would give them incentives to limit supply-side
based increases in costs.
•
Work with private insurers to devise a mechanism of complementary health insurance that covers
additional risks, but which does not eliminate the dissuasive effect of co-payments.
•
Extend the system of referring doctors so as to better control access to some kinds of specialists,
where considerable sums are spent subsidising medically dubious activities. One solution might
be to reimburse visits to specialists that are made without referral at the same rates as visits to
general practitioners.
•
Introduce a rolling cap on ambulatory-care medical services, such that if the ONDAM is violated
in a given year, the remuneration per service in the following year is reduced by the amount of
the previous year's overshoot.
184.
While introduction of such changes would not eliminate the tendency for healthcare spending to
rise, they would increase the levers available to the authorities to exercise pressure on both demanders and
suppliers as well as increase each group's private incentives to limit reimbursable spending. This, plus the
continued pursuit of changes that offer one-off reductions in health care costs appear to offer the best hope
for controlling costs in this area.
Managing fiscal consolidation in the social security system
185.
Effectively applied, the institutional reforms to the budget process outlined above (joint
presentation of the social security and State budgets in a medium-term context) will help by forcing
decision makers to confront the medium and long-term consequences of adding tasks to the social security
system without provisioning them and make it more difficult to mistake cyclical improvements in revenues
for permanent ones. In this regard, further integrating the discussion of the social security budget with that
of the State should help extend to these programmes the kind of scrutiny and arbitrages currently
undergone by programmes covered by the State Budget. Moreover, by treating the Social security and
State Budgets together, it should increase the visibility of opportunities for reallocating resources between
programmes. Finally, it should help the authorities avoid increasing the unfunded tasks assigned to (or
taken on by) the social security system, ideally by explicitly identifying savings in non-priority areas to
finance additional tasks. For instance, a medium-term analysis of family assistance expenditure based on
unchanged policies should, given demographic developments, reveal falling expenditures and therefore the
possibility of reallocating resources to other priority areas where expenditures are growing (such as
healthcare or pensions).
186.
To be able to effectuate such reallocations, the government will need to rethink the financing of
the social security system. Reliance on earmarked funds for the financing of the various social security
regimes and the mixed administration of these programmes seriously constrains opportunities for
reallocations and effectively eliminates 40 per cent of public expenditure from any fiscal consolidation
111
programme, significantly increasing the pressure on other programme areas. Dedicating resources to a
particular policy problem demonstrates the political importance attached to an issue and can, in certain
cases, serve as a hard budget constraint. However, it also unnecessarily constrains policy makers’ ability to
respond to changing priorities and conditions and can result in mission creep and budgetary inertia when
the constraint is not binding.70 For example, the strict budget constraint imposed by earmarking has, in
conjunction with the considerable administrative autonomy enjoyed by the administrators of the UNEDIC,
meant that this unemployment insurance system has more or less succeeded in maintaining budgetary
equilibrium. In contrast, demographic developments have tended to reduce demands on the family
assistance system, which has responded by seeking new missions for itself in order to make use of the
resources that its fixed share in social security charges generate. Finally, in the case of healthcare and
pensions, popular expectations for and the costs of the systems have evolved much faster than the funds’
ability to pay. As a consequence, the budget constraint could not be respected, resulting in the build up of a
substantial debt in the case of the healthcare system and a huge unfunded contingent liability in the pension
scheme. Because of the public policy nature of these activities, responsibility for finding a solution to these
problems has tended to fall to the government.
187.
In order to redress the asymmetries in the governance of the social security system, the
government needs to take a more active and responsible role. The compulsory nature of the funds, the
contributions they impose and the substantial redistributive nature of these contributions gives the State the
obligation to oversee their activities (indeed, this is implicit in the requirement that the State decree the
contribution rates proposed by the funds). Moreover, given the large sums required to finance these
activities and the impact that associated charges and taxes have on the functioning of the economy, the
State would appear to have a legitimate right (if not obligation) to dictate (or at least negotiate) the level of
expenditure and contribution rates for the regimes. The introduction of the Loi de Finances de la Sécurité
Sociale, by placing these issues before Parliament, constituted an assertion of the Parliament’s legitimate
interest in these areas of public expenditure. However, if the authorities are serious in their efforts to
control overall expenditure levels, they will inevitably need to assert this right more directly. In exchange,
however, they may need to take a step back from the management of the expenditures of the social security
systems themselves, giving the social partners the responsibility and the authority to meet the budget
constraint imposed by the State.
188.
One step worth considering would be to replace the funding of the social security by earmarked
taxes with direct financing from the State Budget. Such a move would have the considerable advantage of
facilitating budgetary reallocations and clarifying the true costs of these programmes. Moreover, it would
obviate the need for the complicated cross-subsidisations and extra-budgetary funds that currently
characterise the system. The proposal to transfer contributions from the unemployment insurance scheme
to the pension scheme as society ages works in this direction, although it retains the earmarking of funds.
While stop-gap measures have allowed the system to be maintained, they obscure the financing of the
social security system and mask the true costs of these services in the public eye. Moreover, such transfers
of "dedicated" resources are frequently perceived as an illegitimate misappropriation of funds destined for
one objective towards an unrelated one (from families to pensioners on the one hand and from the medical
and family systems to labour market policy in the other). Finally, the combination of the rapid increase in
these expenditures and their financing through social contributions resulted in an overall tax wedge that
was particularly penalising of labour. To a considerable extent, the distortions that this created have been
eliminated by various reductions in the social charges imposed on low-skilled workers (see Chapter II), but
only by transferring these charges to the State Budget and further undermining the contribution-based
characteristics of the social security systems.
189.
A less radical reform in the same direction would see the authorities make greater use of transfers
from general revenues in subsidising the activities of the various funds. Transforming the State-based
financial support that are currently generated in the form of earmarked excise taxes (90 billion euros, or
6 per cent of GDP) into a direct transfer would allow the authorities to apply these funds according to their
priorities, and could be used as a mechanism to tighten the budget constraint of the funds. Indeed, such
112
funds could be managed in a countercyclical way to help smooth funds revenues and prevent the observed
tendency for parameters to be adjusted in a procyclical manner.71 Moreover, the authorities might wish to
reconsider the contributions they make to funds to extend coverage for certain classes of individual. For
example, the State currently pays the social security contributions of unemployed workers, effectively
subsidising the UNEDIC's de facto early retirement scheme. Making these funds conditional on a reform to
this programme would not only improve the coherence of government policy but also serve to reduce the
spending of both the UNEDIC and the State Budget. Finally, the various special funds that serve only to
move money from one arm of the government to another, albeit social security funds, should be abolished
and replaced by direct transfers.
190.
The authorities (and the social partners) also need to take a close look at opportunities to generate
administrative savings in the social security system. The resort to 38 separate funds and associated
administrations to deliver 3 public services (health, old-age pensions and social assistance) results in
significant inefficiencies (Figure 25) and horizontal inequity.72 Moreover it would appear that a
consolidation of the administration of the funds could result in substantial savings.73 Indeed, it is difficult
to see the utility of the hundreds of independent local administrations, especially given that modern
advances in informatics technology should enable a more centralised and economic treatment of dossiers.
Figure 25. Range of activity of social security schemes
- CANAM
- CNMSS
- Port autonome
de Bordeaux
Working
accidents only (3
schemes) :
Healthcare plus
old age, plus
working
accidents
(7
schemes) :
Healthcare only
(3 schemes) :
Healthcare plus
old age, without
working
accidents
(3 schemes) :
- Banque de France
-EHIM
-Exploitants agricoles
-Mines : CAHSSM
-RATP
-Salariés agricoles
-SNCF
- ATIACL
Working
accidents
without
healthcare (2
schemes) :
EGF
- CAVIMAC
- CCIP
Fonctionnaires
- CRPCEN
Old age only (11 schemes) :
:
- CAMR
- CANCAVA
- CNAVPL
- CNBF
- CNRACL - Comédie française
- FSPOEIE - Opéra de Paris - ORGANIC
- SASV
- SEITA
Health
insurance
Social
insurance
Old-age
1. Excluding general regimes.
Source: Direction de la Sécurité sociale.
113
1
- FCAT
- FCATA
Improving the oversight and efficiency of public expenditure
The new State Budget framework law
191.
The new Budgetary framework law (Loi organique relative aux lois de finances, LOLF)
represents an important step towards enhancing the quality and efficiency of public spending programmes.
This law, which defines the legal framework for the annual Budget Laws, was passed in 2001 and is to be
phased in gradually over the 2002-2006 period. It substantially enhances the oversight and investigative
powers of the Parliament and gives the State Budget process much more of a results and output-based
orientation. Moreover, by requiring the government to present to Parliament a closing account of the
previous year's Budget (Loi de règlement) before it considers the proposals for the following year, the
authorities hope that the LOLF will introduce an element of multiyear planning in what remains a strictly
annual budgetary process. Finally, concomitant with the move to an output-based orientation it delegates
much of the responsibility for the allocation of budgetary envelopes to public-sector managers, while
making them responsible for reporting on and delivering results.
192.
As part of the phase-in of the LOLF, the current 848 budget chapters detailing the inputs
allocated to each Ministry will be replaced by some twenty-odd missions, grouping together various
programmes by objectives. The government retains the sole authority for defining budgetary missions and
their objectives as well as the funds to be allocated to each. Although the parliament can change allocations
within missions it cannot affect them between missions and cannot change the total level of expenditure.
Given the resource allocations made available to them by the parliament and the government, managers are
free to allocate funds across inputs.74 Coupled with this delegated authority will be an enhanced
responsibility, with managers to be responsible for determining and reporting indicators of the extent to
which parliamentary objectives are attained. Parliament, in turn will be responsible for evaluating these
results and revising its policies and law in consequence.
193.
While Parliament does not have the authority to amend total budgetary allocations or those for
given missions, its oversight role does give it a platform to make such recommendations, which the
government may or may not decide to incorporate. This extends parliamentary influence. Nevertheless,
there is scope for extending it further. In particular, while initial budgetary allocations across missions
should remain the purview of the government, the capacity of the authorities to define and pursue priority
objectives could only be enhanced if Parliament were allowed to revise mission allocations (as long as the
original expenditure cap is not exceeded).
194.
The introduction of the LOLF represents a major step forward and an important opportunity to
raise the effectiveness of public policy and the quality of public expenditure. However, experience from
other countries suggests that its implementation will not be straightforward, in part because of the
substantial changes required in terms of both administrative and political culture. Even in countries that
have instituted such a system for many years, results have been mixed. While a real culture of evaluation
has developed in some countries and in some ministries, in others implementation has been pro forma and
the process is considered an additional and not very useful administrative burden. Thus, notwithstanding
the four years allocated for the phase-in of the LOLF, its success is not guaranteed and much will depend
on the political and administrative will to see it through, to allow for experimentation (and failure) and to
nurture a spirit of evaluation and responsibility among both public servants and elected representatives.
195.
To facilitate the transformation in administration culture, it will be essential for spending
Ministries and departments to participate actively in the preparation of mission objectives and evaluation
strategies. To be effective, such objectives must not only be measurable, relevant and attainable, they must
also be seen as legitimate by those that are called upon to achieve them. Thus, while development of these
targets should be overseen by a central agency (so as to ensure the diffusion of best practices in terms of
114
methodology, design and publication of results), care must be exercised to ensure that ownership of the
targets remains with those who will be responsible for their execution. In this respect, Ministries are in the
process of creating objectives for the 2004 Budget exercise and special Ministry-specific groups,
supervised by the Department of the Budget, have been put together to follow the process offering advice
and encouraging laggards. Moreover, pilot projects have been run both at the departmental level and within
the Ministries in an effort both to give an example but also to determine in advance what does and does not
work.
196.
In order for new public-expenditure management techniques to improve the quality and costeffectiveness of programmes, the policy evaluation process needs to be reinforced. Evaluations need to be
structured with an eye to improving programmes, so that specific proposals can be put forward to policy
makers on how programmes can be made more effective and ultimately so that parliament can be advised
as to how appropriations could be amended, cancelled, or distributed over the medium term. Without this,
the evaluation process, and Parliament's role, risks becoming formulistic rather than part of a genuine
process geared towards continually improving the quality of public spending. Too often programme
evaluations fail to adequately control for selection bias and other statistical phenomena. To assist in this
process, new policies should be designed in such a way as to facilitate their subsequent evaluation in a
statistically conducive manner. While the LOLF gives Parliament virtually unlimited evaluation powers75
over almost all public finance issues (including public entities, state enterprises, the local authorities and
the social security sector), ad hoc parliamentary investigations cannot substitute for ones conducted by
those knowledgeable about and responsible for programme results. Parliamentary studies might most
usefully be used as a "corrective tool" in cases where specific Ministerial evaluations are judged to be
inadequate, and to mandate specific analyses into new policy areas or to analyse longer-term questions (i.e.
pensions or healthcare). In this respect, the synergies between public service evaluations and active
parliamentary oversight would be enhanced if the discussions of the Loi de règlement were better
integrated with those of the current year's budget and if the administration was required to make
intermediate reports on new programmes in the context of the Budget debate.
197.
More generally, the resources allocated to evaluation will have to be increased. Already the Cour
des Comptes has indicated that the implementation of the LOLF places substantial new and different
demands upon its resources. To a large extent meeting these new demands should be achieved by
reallocating posts and expenditures within existing budgets, something made easier by the new budgetary
rules. For ministries the new emphasis on evaluation will require new staff with different skills.
Fortunately, the imminent retirement of a large proportion of public servants should allow for new hiring
even as overall staff levels are reduced. Meanwhile, the introduction of a new data system (mission
oriented ACCORD76) should help facilitate the flow of information about indicators, costs and objectives
between the Ministry of Finance, the Cour des Comptes and Parliament.
198.
Although not a specific part of the LOLF, the authorities should consider making much greater
use of techniques such as sunset clauses that require specific-task spending programmes to be abandoned
after a set period of time (typically several years), unless parliament renews their mandate. Such simple
measures, which can be introduced retroactively, help combat programme and spending inertia. While such
clauses have been criticised as ineffective in some cases, they have been effective in other jurisdictions.
Using them to force a regular review of tax expenditures might be useful as such programmes, which
involve billions of euros, tend to fall out to the public eye because of their passive nature.
199.
The authorities might also wish to re-examine the process by which budgetary expenditures are
authorised. The authorisation and audit process, involving three ex ante verifications, is relatively heavy
and seems in many respects contrary to the spirit of delegation of authority and responsibility incorporated
into the LOLF. Perhaps a system involving a single Ministerial ex ante verification and a reinforced ex post
audit system would be just as effective and less expensive to administer.
115
200.
The LOLF only applies to the State Budget. As a result, the remaining 50 per cent of
consolidated central government expenditure continues to be budgeted on the basis of inputs. Nevertheless,
progress has been made in establishing political oversight of social security expenditures. As noted, since
1996, spending at this level has been exposed to parliamentary scrutiny in the context of an annual Budget
Bill for Social Security, the PLFSS, which allows parliamentarians to discuss social security funding at the
same time as the State Budget. Moreover, an element of output-oriented budgeting has also been
introduced into the State's budgetary relations with the social security agencies. Increasingly, the State is
passing explicit contracts with the regimes that detail both their objectives and responsibilities
(Conventions d'objectifs et de gestion, COG). These could perhaps be improved by requiring a more
regular reporting of the impacts of programmes and incorporating a discussion of these into the debate on
the PLFSS held each year in parliament. Indeed, a thorough and regular confrontation between the
objectives of these programmes spending and their results would help ensure that their goals are achieved
at least cost. Moreover, it might well lead to a clearer societal definition of what those objectives are and in
this way help to contribute to a constructive reform dialogue.
Raising efficiency at the sub-national level
201.
Existing financial rules concerning sub-national governments strike a good balance between
national and local interests by ensuring fiscal sustainability while granting substantial autonomy to local
governments as concerns the content of expenditure. Balanced budget requirements and the strict pro rata
release of funds to local authorities help guarantee the smooth execution and monitoring of local level
public expenditures by the central government and prevent the emergence of major fiscal imbalances.
While these rigid cash-flow rules may prevent sub-national governments' from organising their capital
expenditures in an optimal manner, they have the advantage of granting local governments budgetary
predictability and the liberty to manage money in accordance with local needs.
202.
Ongoing efforts to rationalise and better identify the roles of different governmental actors
working at the local level should be pursued, especially given the large and rising share of general
government services delivered by these levels of government. The authorities’ proposed decentralisation
initiative seeks to do just that (Box 12). Currently, overlapping responsibilities and various co-financing
mechanisms have weakened service providers’ incentives to reduce costs. Under the planned reform both
financial and administrative responsibilities will be more closely aligned with the natural geographic
hierarchy of existing government levels. Thus, regions are to be made responsible for defining broad
strategies, departments for delivery and coordination of most local services and infrastructures, while
municipalities are to continue being the primary deliverer of such services.
203.
This is an important initiative, which if implemented (certain aspects of the reform have recently
been put into doubt and its implementation delayed) could generate substantial efficiency gains. In
particular, the transfer of both a fixed budget envelope and responsibility for the regional administration of
hospitals could help rationalise the distribution of small hospitals and clinics, which until now has been
slowed by the conflicting interests of their owner-managers (local municipalities) and the State, which was
responsible for financing them. Similarly, transfer to the departmental level of financial and administrative
responsibility for both active labour market policies and the main cash social benefit (Revenu minimum
d’insertion, RMI) should help sharpen incentives to actively help beneficiaries to find work (the further
proposal to transform the RMI into a more active instrument was discussed in Chapter II).
116
Box 12. Decentralisation
1
The government hopes to put in place a major decentralisation reform and has already amended the
constitution, with an eye to creating a framework for subsequent changes. The reform seeks to clarify the
roles of various levels of government in the hope that clearer responsibilities will lead to better (and more
efficient) governance. In particular, under the reform the:
• State retains the responsibility for setting national norms, ensuring national security, justice, education,
employment, public health, taxation, national infrastructure and territorial equilibrium.
•
Regions should ensure the coherence and strategy at the level of the department for:
–
youth employment and training programmes,
–
universities,
–
lifelong learning,
–
industrial policy,
–
regional and sub-regional transportation infrastructure,
–
certain healthcare programmes, notably regional hospital agencies, ARH.
• Departments are given substantial additional powers, principally having to do with social policy and
local infrastructure projects. In particular, they will be:
–
made responsible for the management of the RMI,
– given responsibility for the maintenance of regional infrastructure, including schools and
national roadways (but not autoroutes),
–
•
take responsibility for some 100 000 school maintenance employees.
Municipalities remain in charge of the provision of local services.
In order to ensure that sub-national governments have the appropriate incentives to manage their new
responsibilities the state will transfer an equivalent amount in financial resources. In particular, it proposes
to transfer to the regions part of petrol taxes (Taxe intérieure sur les produits pétroliers, TIPP) and to allow
them to set (within bounds) the rate at which the tax will be applied.²
Moreover, it intends to improve and simplify the system of regional equalisation so as to ensure that less
wealthy subnational governments have the financial means to deliver the services required of them.
__________________________
1.
The bulk of this box is based on the Speech by M. Jean-Pierre Raffarin, the Prime Minister of France, given in
Rouen on 28 February 2003 (http://www.premier-ministre.gouv.fr).
2.
Such a step requires the approbation of Brussels, which has yet to be provided.
204.
The success of efforts to increase the incentives for municipal level governments to cooperate in
the provision of services illustrates the effectiveness of such strategies to increase efficiency and the
117
quality of services. Here, the 1999 reform creating a special category of Public Enterprise for municipal
cooperation (Établissements publics de coopération intercommunale, EPCI) has helped overcome the
serious problem posed by the large number of municipalities with fewer than 20-30 thousand inhabitants, a
level estimated to equal the minimum efficient size for this level of government. These EPCIs permit
smaller municipalities to jointly provide services and infrastructures (such as those for local transport and
waste management) in conjunction with a larger one, which acts as a hub.77 Already some 2 360 EPCIs
have been formed, covering 90 per cent of France's population, effectively taking over the activities of
various other cooperative forms previously created to address this issue. A less clear success are the local
public-service companies (Sociétés d'économie mixte locales, SEM), which have until recently enjoyed an
unfair competitive advantage vis-à-vis private firms. A recent ruling requiring municipalities to place the
management of large projects to public tender should help harness competitive pressures, reduce costs and
spur the development of a sounder market for public works at the local level.
205.
The benefits of output-based budgeting should be extended to sub-national governments.
Technically, there are no obvious impediments to moving in this direction. Within the context of the
LOLF, the decentralised services of the State are already moving in this direction (departmental prefectures
were some of the first groups to experiment with defining objectives and indicators) but more could be
done. A more systematic and rigorous implementation of results-oriented budgeting could, for instance,
break down local-level resistance to the closure of under-utilised and uneconomic services, if in fact they
resulted in improved services or significant cost savings for the locality.
Summing up
206.
Since the early 1990s, when France's general government deficit reached a disturbing 6 per cent
of GDP, the country's public finances have progressed substantially, even though significantly further
improvements are required. This principally reflects a substantial increase in taxes and a stabilisation of
expenditures’ share in output. Looking forward, the ageing of the population is expected to generate
substantial new spending pressures and at the same time slow the pace of growth, putting into question the
economy's longer-term fiscal sustainability. Given the already very high tax burden, policy needs to focus
on controlling the rate of increase in public expenditures, including those of the State and subnational-level
governments -- but especially those of the social security system where cost pressures are likely to be
strongest. The future progression of ageing-related costs is relatively well known, as is the unsustainability
of public finances in the absence of reform (see Chapter I). To meet this challenge, fiscal room needs to be
made now and the overall debt reduced so that when these additional expenditures arise they can be met
without threatening the overall sustainability of public finances.
207.
This chapter has examined the tools available to policy-makers to meet this challenge and Box 13
summarises its principal recommendations. The clearest message is that given the relatively small size of
the State Budget in total spending, the challenge cannot be met by the State sector alone. Social security, as
the principal source of spending pressure, must play a role, but so too must sub-national government
-- especially if current plans to transfer additional responsibilities to the local level go through. If policymakers are to succeed in directing public expenditure so as to create this room, they will have to clarify
governance structures so that those who administer programmes face appropriate incentives to control
costs and maximise programme efficiency. Too often financial responsibility and administrative
responsibility are not held by the same body so that resulting conflicts contribute to policy inertia and
blocked reforms. The authorities’ decentralisation programme is a clear and important step towards
clarifying roles. However, it does not address the second major difficulty, the lack of mechanisms to
moderate the growth of public spending so as to create the fiscal room necessary to cushion forthcoming
spending pressures.
118
Box 13. Summary of recommendations
Aggregate fiscal discipline
− In order to improve the information available to policymakers and to prevent expenditures from rising
permanently, measures should systematically include, at all levels of government, evaluations of their
medium-term impacts on the general government.
− In order to increase the authorities capacity to reallocate resources, the State and Social Security
Budgets should be more clearly integrated into a medium term framework.
− It is important that the macroeconomic framework underlying budgetary assumptions be more closely
in line with economic potential.
− Concerning specific programmes, information about individual Budget missions and social security
programmes should be precisely displayed as a way to better isolate the influence of different spending
programmes.
Ensuring the effectiveness of the new State budget framework law
− Letting spending Ministries and departments participate actively in the preparation of missions
objective and evaluation strategies will be key to ensuring that those who are called upon to implement
such objectives see them as fully legitimate.
− In order for new public-expenditure management techniques to improve the quality and costeffectiveness of programmes, the policy evaluation process needs to be reinforced.
− The resources allocated to evaluation might need to be increased, something that can be achieved
through reallocation of posts.
− As a means to combating spending inertia, the authorities could consider making greater use of sunset
clauses that require specific task-spending programmes to be abandoned after a set period of time.
− Although the new budgetary framework only applies to the State Budget, the authorities should
envisage measures requiring a more regular reporting of the impacts of social security programmes and
incorporating a discussion of these into the parliamentary debate on the PLFSS held each year. The
benefits of output based budgeting should also be extended to sub-national governments.
Local governments
− Bringing forward the preparation of local government budgets would help improve co-ordination and
the preparation of the general government budget.
− The ongoing reform to rationalise the roles of different sub governmental actors should be phased in as
planned. If its spirit is preserved during its realisation, it would go a long way towards generating important
efficiency gains.
Mandatory expenditures
− Transforming into direct transfers the aid the State currently provides the social security system in the
form of earmarked taxes would go a long way towards reducing presently observed rigidities in budgetary
allocations.
119
− Making the budgets of the social security regimes more binding would help bring healthcare
expenditure under control.
− In order to make individuals and their private insurance schemes more interested in controlling costs,
access to basic coverage should be made more universal, consistent with current government's plans,
while also conferring more of the overall costs to complementary regimes.
− Specific recommendations concerning the reform of the pension system are outlined at the end of
Chapter II.
208.
To meet this challenge -- both as concerns sub-national and social service expenditures -- the
authorities should consider expanding both the scope and the duration of the budget process to include the
social security and sub-national sectors. A more integrated and multiyear budget would help expose all
spending to the same degree of oversight and competition, while confronting decision-makers with the
medium-term consequences of their actions. To be effective, such a reform would require that Parliament
increase its influence over the revenues of the social security funds and introduce mechanisms that make
their budgets more binding. Furthermore, the additional autonomy and expanded spending responsibilities
that decentralisation will bring to sub-national governments need to be combined with a responsibility to
respect national spending norms. Finally, if the medium-term features of such a programme are to help
guide policymakers, projections need to be based on prudent macroeconomic assumptions and the sources
of future savings need to be identified.
209.
Of course, such institutional changes cannot in and of themselves generate the savings necessary
to ensure fiscal sustainability. Here, the ongoing reform of the pension and healthcare systems will play
critical roles. As the simulations in Chapter I make clear, failure to generate the kinds of savings proposed
by the authorities between now and 2020 will place serious strain on the economy. Moreover,
notwithstanding the ambition of current proposals, this is just a beginning and much more needs to be done
to restore equilibrium to the pension regimes.
210.
Health reform will also be important. Several propositions currently on the table, including
decentralisation, an extended role for complementary coverage, and perhaps a reduction in the range of
services covered, would serve to reduce health insurance costs and contribute to their slower progression.
However, they do little to make the budget constraint of the system more binding and in this regard the
1999 Economic Survey made a number of suggestions, which remain relevant. For the State Budget, the
new budgetary framework may help contribute to a slower and more effective expenditure growth. To
maximise the chances that this reform will be successful, the high level of support that it has enjoyed so far
will need to be maintained, both at the political level and on the part of all of those responsible for public
spending.
211.
The fiscal challenges facing France in the coming years are enormous and will require important
fiscal adjustments. While the path ultimately chosen will doubtless be different from the one outlined here,
it will necessarily address the same problems. Whatever form they take, reforms along these lines could go
a long way to helping ensure that France is able to meet its future challenges with a minimum of disruption
and while maintaining a high level of public services.
120
NOTES
1.
These other general government organisms includes special funds put into place to transfer money from the
State Budget to the social security system, notably the retirement reserve fund and a special fund designed
to deal with the debts incurred by the bailout of Credit Lyonnais in the 1980s.
2.
Perhaps, the first time ever such credits have been cancelled outright, without an offsetting increase
elsewhere.
3.
The reform also included a 0.6 percentage point hike in social security charges, but these come into effect
in 2003 and therefore do not explain the projected improvement in the accounts in 2004.
4.
Based on OECD estimates (2000) of a 1.9 per cent of GDP funding gap for the health system and, at one
end of the range, the COR’s (2001) baseline scenario (deficit of 4.5 per cent), which comprises a
substantial improvement in various structural policies, notably unemployment (down to 4.5 per cent). The
upper end of the range is based on the same OECD estimates and a “no-policy change” scenario, the COR
“gris” scenario, which nevertheless incorporates a fall in the unemployment rate to 7 per cent. All scenarios
incorporate a regular full in private-sector replacement rates as the 1993 pension reform continues to come
on stream (see Annex 1 for more details).
5.
This is strictly true for the private-sector scheme only as under the public-sector scheme benefit levels are
based on one’s final salary not a weighted average of the previous 25 year’s salary.
6.
For more details on assumptions underlying these simulations, see Annex I.
7.
In the reference scenario, it is fixed at 2 per cent per year, which is higher than during the recent period of
relatively job-rich growth, but approximately equal to the rate observed during the 1980s.
8.
Youth employment rates at about 50 per cent were much higher in the 1970s. Their fall to less than half
that level in 2001 (23 per cent ) coincides with the increase in joblessness in France. While other OECD
countries saw youth employment rates decline, none did so to the extent that they did in France. In Sweden
which has the second largest drop in employment rates, the fall was much less marked and youth
employment rates there are twice French levels.
9.
All told six of ten of the 30 per cent of individuals who left the emploi-jeunes programme before the end of
their contract found employment. However, only one third of these (6 per cent in total) found employment
in the private sector. Most participants continued on to the expiration of their contract without finding
unaided work or another emploi-jeune (Bellamy, 2002a).
10.
Approximately 40 per cent of participants fail to find a job before the programme ends (nominally after
18 months), some of these have the programme extended while others jump to a training programme
presumably to prolong access to State aids.
11.
56 per cent of youth awarded these contracts were working previously, 33 per cent in a normal job and
23 per cent under an apprenticeship contract. A further 30 per cent were unemployed while the remainder
were mostly in school.
12.
The programme is restricted to youth (<26 years of age) with poor qualifications, older workers (>50 years
of age) without work, the long-term unemployed and handicapped persons.
121
13
Twenty-five per cent of interim workers have a permanent contract a year later, as compared with one-third
with a fixed-term contract and only 13 per cent unemployed.
14.
The law stipulates both "normal" working time (35 hours per week) and the maximum number of overtime
hours that may be worked, the total being referred to as the contingent. This problem for small- and
medium-sized firms was discussed in the 2001 Economic Survey.
15.
Dares, http://www.travail.gouv.fr/dossiers/dossiers_f.html
16.
Virginie Malingre « L’UNEDIC dresse un constant alarmant du régime d’assurance chômage des
intermittents du spectacle », Le Monde, August 22, 2002.
17.
McKinsey (2002) reports that fully 10 per cent of the work force in the US earns less than the French
SMIC.
18.
A significant proportion of this rise is due to increases in the SMIC, which all other things equal raises the
number of individuals with a salary close to the SMIC. Nevertheless INSEE (2001) concludes that the post
1993 period saw the number of low-qualified workers rise substantially, reflecting lower social charges for
both full-time and part-time workers.
19.
Approximately 46 per cent of employees earning the SMIC work for firms that have not yet entered into a
35 hour workweek agreement.
20.
The end to compulsory military service was progressive, applying to young men born after 1978. This
meant that as of 1997, the year the reform was introduced, the potential population of conscripts began
falling. Moreover, young men in school or at work were permitted to delay their military service to avoid
interrupting their careers. In the past this had the effect of reducing youth unemployment as such
individuals would enter military service (and therefore exit the labour force) when they lost their jobs. As
of January 1st 2002, no more conscripts were received, effectively exonerating those who had yet to
undergo their military service because of various delays even if they were born before 1978 (Minni and
Poulet-Coulibando, 2003).
21.
Such studies are necessarily much more complex as they have to take into consideration problems such as
selection bias (individuals selected or qualifying for a programme may be more likely to succeed) and
require a close follow up on the population that did not participate in the programme –individuals who are
more difficult to identify than those that did.
22.
Givard (2002). The rise in unemployment also plays a small role, while for women the trend rise in their
labour force participation has a small opposite effect.
23.
Zaidman et al. (2000) cite a number of studies attesting to the limited or even negative impact of early
retirement on unemployment over the long term.
24.
Zaidman et al. (2000), p. 103.
25.
Naturally, conditions apply. Workers older than 50 having worked 6 of the last 22 months are entitled to
7 months benefit, those having worked 14 of the last 24 are entitled to 23 months benefit, while those
having worked 27 months in the previous 36 are entitled to a benefit of 36 months duration. In addition,
those over 57 years of age and having 25 years professional experience are entitled to a total of 42 months
of benefits.
26.
The classification of certain categories of jobs as difficult and deserving of special treatment is necessarily
a hazardous exercise, leaving some individuals working in truly onerous conditions uncovered, while
others whose jobs are not nevertheless meet the criteria of the programme and qualify. Moreover, in
practice these programmes tend to favour (and implicitly subsidise) the labour management issues of
122
certain kinds of firms. Thus, employees of large unionised firms tend to be over-represented in these
programmes, both because of the definitions retained for onerous work, but also because larger firms are
better able to amortise the cost of gaining admittance to these programmes across a larger number of
workers (Anglaret and Massin, 2002).
27.
A survey conducted by the CSA indicates that 59 per cent of the population would be willing to accept a
smaller pension in exchange for an earlier retirement, while 37 per cent indicated a preference for working
longer in exchange for a larger pension (Les Echos, 21 January, 2002).
28.
Récépisse de Création d’Entreprise.
29.
Some sectors may, due to the nature of their activity, require a larger capitalisation.
30.
For the purposes of the legislation, these are defined as firms that spend at least 15 per cent of their total
expenditures on research and development and are less than 8 years of age. The Ministry estimates there
are currently some 800-1000 of such firms, which should limit the deadweight loss associated with
providing such aids to older firms.
31.
Among OECD countries in 2001-02, five provide tax credits on incremental R&D expenditures only, four
on the level and two on both the level and increment.
32.
Principally via the Ministry of research; the fund for research and technology; the Ministry of Industry,
Finance and Economy; and the Environmental and Energy Agency.
33.
The authorities estimate that in 2001 only 15 such angels operated in France in contrast to several hundred
in the United Kingdom.
34.
See, for instance, the special section "Aujourd'hui: Sciences" of Le Monde 12 March 2003, pp. 24-25.
35.
These include: King and Rebelo (1990), Englander and Gurney (1994), Slemrod (1995), Leibrfritz et al.
(1997) and Bleaney, M. et al. (2001).
36.
Generally France does poorly in terms of international comparisons of corporate income tax burdens.
Indeed, only in ex post calculations of corporate tax burdens does it appear within the average range.
Rather than be comforting, this likely reflects a combination of selection bias and the operation of market
forces. Firms operating in France are either those that are less impinged upon by the tax system or those
that have succeeded through tax optimisation strategies in lowering their tax burden down to the average.
37.
The bias in favour of large firms reflects the influence of a favourable amortisation scheme for
manufacturing companies, which is particularly evident for large firms in the construction, transportation
and energy sectors.
38.
Comprising employee and employer social security contributions, personal income tax and the generalised
social contribution (CSG).
39.
See for example, World Economic Forum (2002) which ranks France as a country where such rules and
regulations are particularly onerous.
40.
Cross subsidisation of services and various implicit and or explicit transfers from the State Budget have
served to shift these costs either to other users – or to taxes. Such practices have been greatly curtailed in
recent years, although the SNCF still benefits from a substantial subsidy in so far as the management fees it
charges the Réseau Ferré de France, the owner of France’s rail system, greatly exceed the fees it pays for
using the system -- thereby transferring the operating losses of SNCF to RFF whose shortfalls are covered
by transfers from the central government.
123
41.
Paul Questiaux, « La privatisation d’EDF et la concurrence », Les Echos, 13 February 2003.
42.
Minister of Transport, Gilles Robien, cited in Samuel Coulon, « Gilles de Robien défend la nécessité de
privatiser la compagnie », Les Echos, 13 February, 2003.
43.
Other major recipients were Etablissement Public de Financement de Restructuration, BULL, (the
beleagured state-owned computer manufacturer) and Charbonage de France (the State Coal company).
44.
For instance, the authorities appear to have used their position in State-owned firms to help support a
privately owned French firm resist a takeover attempt by a foreign company. In this particular instance,
state-owned or firms with a state representation on their boards helped the French firm overcome cash-flow
difficulties by purchasing some 10 billion euros worth of shares in a subsidiary that it was selling.
45.
Similar operations have been conducted in the Czech and Slovak Republics and Hungary.
46.
A detailed analysis of French climate policies can be found in the chapter on Environmentally sustainable
growth in the previous Economic Survey of France.
47.
Eight new nuclear reactors came online during that period.
48.
Such growth would be somewhat below potential economic growth in this period, as estimated by the
OECD.
49.
A provision equal to 0.3 cents per kilowatt hour is placed on EDF’s balance sheet. The total of the reserves
for waste treatment and decommissioning amount to 29 billion euros.
50
EC (2000) provides more details on these developments.
51.
Farmers were offered subsidies covering 60 per cent of investment, primarily for manure storage, at a
likely cost of 2 285 million euros between 1994 and 2006.
52.
Marginal costs may be estimated at 0.75 euros per kilogram of nitrogen.
53.
The tax varies from 71 euros per tonne for detergents without phosphate to 87 euros for those with high
phosphate content.
54.
Polluters can opt to pay the tax based on actual discharges. Polluters with above average emission
intensities have no incentive to opt for this system and so have no incentive to reduce discharges.
55.
Overall, government expenditures increased by more than 200 per cent in volume terms between 1970 and
the beginning of the new millennium, 30 per cent more quickly than GDP itself.
56.
This compares with 52 per cent in the European Union considered a whole.
57.
Calculations based on UN demographic projections, Commissariat Général du Plan (2002).
58.
Excluding public works employment and employees of State-owned enterprises. Calculations based on
INSEE (2002) and Commissariat Général du Plan (2002).
59.
This compares with an average of 30 per cent for OECD unitary states (OECD, 2003).
60.
The share of social security contributions levied from payrolls represents about 50 per cent of the funding
of the health system, 59 per cent of that of the family and social assistance regime and 71 per cent of the
old age pension system.
124
61.
The CSG represents 34.5 per cent of healthcare revenues and 20.7 per cent of those destined for the social
assistance system. The old-age pension system does not receive revenues from the CSG.
62.
The relatively healthy budgetary balance of the social security system does not reflect expenditure restraint
but efforts to reinforce its revenues by increasing its share in tax revenues and State transfers.
63.
Although a 50 per cent cut in State expenditures represents about 9.5 per cent of GDP, pre-existing state
employee pension obligations (which are financed from general revenues) are projected to grow from
about 2 per cent of GDP to some 6 per cent of DGP in 2050, reducing considerably the public savings.
64.
The authorities justified this difference by the presumption that there existed a significant negative output
gap that could be absorbed. While OECD estimates of potential growth are broadly in line with those of the
authorities (see Chapter II), they suggest that the gap in 2002 was significantly smaller than the one
outlined in the PLF.
65.
For instance, rather than reacting counter-cyclically, labour market policy spending appears to have
increased structurally over the past decade (IMF, 2002). In particular, expenditures for subsidised statesector employment did not diminish towards the end of the last decade, notwithstanding reports of
widespread hiring difficulties in the private sector and indications that these programmes were having
limited impact on the long-term employability of participants.
66.
The share of social security spending in GDP has risen by 50 per cent since 1970, from 12 to 18 per cent.
67.
Specific examples in recent years include the introduction of a universal healthcare coverage, a programme
of in home assistance for the aged and in large measure the cuts to social security contributions to offset the
costs of firms from moving to the 35 hour work. Indeed, it should leave open the possibility for a reversal
in trends.
68.
Based on the assumption of a person having contributed 40 years, aged 62 years of age and with a real rate
of return of 3 per cent.
69.
Currently hospital-based care is budgeted, giving individual hospitals little financial interest in reducing
costs.
70.
Indeed, it is largely because the rigidities implicit in earmarking that the constitution explicitly prohibits
earmarking of funds within the Budget of the State.
71.
The expenditures of the unemployment insurance system, which should normally be strongly countercyclical, have been pro-cyclical on a structurally adjusted basis. Rather than paying down its debt or
building up reserves during up-turns, the UNEDIC has reacted, on more than one occasion, by reducing
contributions and increasing benefits -- only to reverse itself during the downturn.
72.
This is perhaps most obvious in the case of the pension schemes, where, barring reform, the tax payer is
being asked to pay the deficits of the most generous special and complementary regimes.
73.
Administrative and management costs are estimated to represent 10 per cent of non-hospital medical
expenditures (Commission de comptes de la Securité Sociale, 2000). This falls to 6 per cent if hospital
grants are included in the denominator but State contributions to hospital administration excluded.
74.
The degree to which such responsibility will be delegated in practice remains to be seen. Both the political
and social sensitivity of staffing decisions, may seriously constrain managerial freedom in this regard,
while ceilings on expenditure appropriations will limit the fungeability of resources.
75.
To date these powers have not been exercised, perhaps reflecting the early stages of the transition.
125
76.
The system is being brought into play in two phases. Overall, it seeks to equip the central administration
with a common expenditure management and accounting software application for the stockage and
retrieval of indicators, accounting information both at the macro- and micro-budgetary levels. Already
eight ministries have been linked to ACCORD I and the remaining three large ministries (Agriculture,
Foreign Affairs and Defence) are scheduled for a link by the end of 2003. During 2005 and 2006,
ACCORD II will be launched to encompass other minor central services and the local administrations.
77.
The responsibilities of the EPCI are defined by the municipalities whose elected members form their
managing assemblies.
126
ANNEX I.
LONG-TERM FISCAL SIMULATIONS
1.
This appendix provides detail on the fiscal simulations discussed in Chapters I. Crucial to all of
the simulations are the assumptions employed to project potential output over the next 50 years and these
are discussed first, followed by descriptions of the modelling of alternative measures that might taken to
improved long-term fiscal positions.
Potential output
2.
Potential output is calculated using the production function approach described in Giorno et al.
(1995). In brief, trend business sector employment, hours worked, total factor productivity (TFP) and the
business sector capital stock are combined using Cobb-Douglas production technology to calculate trend
business sector output, to which the relevant government outputs (real public sector wages and
consumption of fixed capital) are added to define total economy potential output. The path for potential
output until the end of 2008 is taken from the latest OECD forecast (EO 73) and medium-term reference
Scenario (MTRS). Beyond 2008, for the base case “no policy change” scenario it is assumed that:
− Business investment will grow at a rate that keeps the business sector capital-to-output ratio
stable;
− Trend hours worked will continue their estimated trend decline in the MTRS of -0.3 per
annum until 2020 at which point the level of hours worked is constant;
− Population growth will turn negative in around 2011 and remain so until 2050 as per the
latest “medium variant” of the United Nations population projections,
− Trend unemployment (the NAIRU) will remain constant at the MTRS level of 8.8 per cent;
− Trend employment rates will increase slightly at around 0.5 percentage points per decade
reflecting the assumption that the general increases seen in recent trend female participation
rates will continue forward, outweighing the “population ageing effect” that occurs from
lower levels of participation in older age cohorts.1
− Trend labour productivity growth will remain constant at around 2 per cent per annum, the
trend rate estimated for France over the recent past, and;
− Government sector outputs will grow at the same rate as business sector potential output.
3.
The alternative potential output scenarios shown in Tables 3 and 4 of Chapter I maintain the same
assumptions as the base case with respect to trend hours worked, population growth, and the government
sector. Unemployment in the reference scenario is assumed to fall to 4.5 per cent in line with the
simulations done by the COR. To examine the impact of increasing employment rates, male labour force
participation rates are arbitrarily converged by around 2030 to average OECD levels for cohorts where
current participation rates are below OECD levels (i.e. youths, 20-24 year olds and older workers).
127
Together with the assumed catch-up process of female participation rates described in the base case, this
implies the aggregate participation rate rises significantly above current average OECD levels. For this
reason, in the fiscal consolidation scenarios present in Table 4 a more conservative process of catch-up is
posited such that the aggregate participation rate increases by half the magnitude to a still high 76 per cent.
4.
To examine the impact of increases in trend labour productivity two sources are looked at: a
permanent increase in the capital-to-output ratio of 0.2 (and investment growth) and a permanent increase
in TFP growth of around 0.22 per cent per annum. Both sources serve to increase labour productivity,
however, the increase in TFP growth is more profound as it requires even more investment in order to keep
the capital-to-output ratio stable. As an intermediate case, in the fiscal consolidation scenarios the increase
in labour productivity growth is halved and is driven by a more moderate increase in TFP growth of around
0.1 per cent per annum, while the capital-to-output ratio still increases by 0.2.
Projection of fiscal positions
5.
Fiscal scenarios are projected from 2009, taking the recent MTRS ending in 2008 as the starting
point. In the base case fiscal projections all government expenditures excepting those related to ageing are
kept constant relative to potential output, while in the fiscal consolidation scenarios seen in Table 4.
decreases in non-ageing expenditures are built in. In all scenarios, health care costs are project to increase
by 1.9 per cent of GDP by 2050, as per the OECD (2000) long-term health care projections.
6.
Due to data constraints a detailed construction of pensions costs was not undertaken, instead, the
COR (2001) reference scenario is used to infer pension costs. That is, the absolute real pension costs as per
the COR study are taken as given, although the costs relative to GDP differ reflecting alternative potential
output assumptions. For example, in the base case scenario pension costs relative to GDP by the end of
2040 are around 15.2 per cent of GDP, some 0.5 per cent lower than the COR gris scenario, reflecting the
cumulative impact of marginally higher potential output growth.
7.
In scenarios where employment rates are higher than the base case real pension costs are
presumed to grow by 1/25 of the increase in productivity each year, reflecting private sector rules. This
reflects the presumption that the increases in employment entailed will be entirely met by private sector
employment where employees contribute to private pension plans. In contrast, in the scenarios where
productivity growth is boosted real per capita pension costs (in absolute terms) are projected to increase.
This reflects the standard assumption that higher productivity growth will be passed on into higher real
wages, hence increasing the pension entitlement of each retiring cohort. Crucially, however, the retirement
costs as a share of GDP are lower in the short run as a share of GDP, implying an improvement in the
deficit and debt dynamics relative to the base case.
8.
To project debt dynamics it is assumed that debt serving costs will remain constant as a share of
the debt stock, or in other terms, that the interest rate on government debt will stay roughly constant. This
is a relatively benign assumption -- were debt servicing costs to rise as debt levels became unsustainable,
deficits and debt would rise by substantially more.
NOTE
1.
Detailed quinquennial data of labour force participation rates and population levels differentiated by sex
are used to calculate the aggregate participation rate. In particular, the average increase in female
participation rates seen in the 1990s are used to project female participation rates forward subject to the
constraint that they do not exceed 95 per cent of current male participation rates. In turn, male participation
rates are assumed to remain constant in each cohort. The participation rates are then combined with
projections of population shares in each cohort to calculate the aggregate participation rate.
128
GLOSSARY OF ACRONYMS
ACCORD
ACOSS
ARHs
ARPE
ASFNE
APA
APE
BAPSA
CADES
CEA
CEC
CES
CGP
CIT
CNAF
CNAMTS
CNAVTS
COG
COR
CSG
EDF
EPICs
EPCIs
EU
FCATA
FCAATA
FIP
FOREC
FRR
FSV
GDP
GIAT
GDF
GHG
IGF
ISF
INSEE
IPO
LOLF
New State’s mission oriented data system
Central fund for social security
Regional hospital agencies
Employment replacement allowance
(an early retirement scheme)
Personalised assistance allowances to the elderly
State ownership agency
Separate annex budget for the agriculture social fund
Fund for the amortisation of the social debt
Prime Minister’s Economic Analysis Council
Consolidated employment contract
Solidarity employment contract
General Planning Commission
Corporate income tax
Family social security regime
Healthcare social security regime
Old age social security regime
Management target and management conventions between the State and the social
security regimes
Retirement Advisory Council
Generalised social contribution
French Electricity Company
French Public Companies
Public Companies for municipal cooperation
European Union
Asbestos workers early retirement fund
Agriculture work accident fund
Local investment funds
Fund for the financing of the reform of the enterprises’ social charges
Retirement reserve fund
Old age solidarity fund
Gross Domestic Product
Armament Company
French Gas Company
Greenhouse gas
General Finance inspectorate
Wealth tax
National Institute for Statistics and economic studies
Initial public offering
New framework law for the State Budget
129
MINEFI
ONDAM
PARE
PEE
PES
PIT
PLF
PLFSS
PPE
PPES
R&D
RFF
RMA
RMI
RRIT
SEMs
SIFE
SNCF
SMEs
SMIC
SNECMA
TIPP
TRACE
UNEDIC
URSAFFs
WHO
Ministry of Industry, economy and finance
National health spending target
Return to employment assistance scheme
Enterprise saving plan
Public employment service
Personal income tax
State draft budget
Draft social security budget
An earned-income tax credit
Voluntary saving partnership plan
Research and development
French railways infrastructure company
Minimum activity revenue
Guaranteed minimum revenue
Research and technology network
Local public service companies
Insertion and training stage programme
French railways Service Company
Small and medium seized enterprises
Minimum insertion wage
Aeronautical manufacturing firm
Petrol tax
Access to employment programme
Organisation in charge of the management of the unemployment insurance scheme
Regional agencies in charge for collecting social security contributions
World Health Organisation
130
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